MNI POLICY: Call For GBP100Bln Bad Debt Recovery Corp In UK

-Scheme Sprang From Conversations With BOE Head Bailey

-Aims To Ease Burden Of SMEs Struggling To Repay Government Loans 

By David Robinson

     LONDON (MNI) - A City group with close links to both the Bank of England

and Treasury has called for the creation of a new body that will aim to prevent

the shock of up to GBP100 billion defaults by small-to-medium sized firms on

government Covid 19-related loan schemes.

     TheCityUK Recapitalisation Group, the working body behind the scheme, has

developed a series of detailed options to allow smaller firms to either turn

government loans into tax liabilities or, through financial engineering, into

subordinated loans or preference shares.

     "All this started with a conference call with the Governor of the Bank of

England Andrew Bailey, probably around the end of March, and he was referring to

the already quite substantial volumes of lending that had taken place under the

government (Covid) schemes," Adrian Montagu, a senior figure at TheCityUK and

chair of insurer Aviva, said Thursday.

     Montagu said that while the government has pumped in vast amounts of

lending "these loans have to be repaid. We think that there will be probably up

to GBP100 billion of unsustainable debt (around 5% of GDP) when we get to March

next year."

     --STRONG CAST

     Among those on the steering committee is John Kingman, chairman of Legal

and General and previously a high ranking Treasury official who handled the

nationalisation and recapitalisation of various UK banks during the global

financial crisis.

     The group's detailed proposals include a Business Repayment Plan which will

convert the Treasury's Bounce Back Loans into tax obligations.

     Another proposal is its Business Recovery Capital scheme which will convert

government guaranteed loans into either subordinated debt or preferred share

capital agreements and a third proposal is to use a mix of financial

instruments, including preference shares, to provide growth capital.

     The legal challenges in creating a new body that will seek to attract

private sector capital are complex, in part because of the finding ways of

dealing with the government guarantees behind the business loans if they are

taken on by a new body.

     --GERMAN LEAD

     One inspiration behind the proposed new body is Germany's KfW, the state

owned development bank with the UK version aiming to pull in an increasing share

of private sector funding over time.

     Omar Ali, UK Financial Services Managing Partner at EY, stressed the need

for speed, with a survey finding one-in-three firms that have taken government

loans saying that they have a month or less of cash reserves.

     "Simply delaying payment of the loans ... is not going to be a solution in

and of itself," he said.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,M$$BE$,MFB$$$,MGB$$$]