By March next year, UK businesses are likely to face between £97bn to £107bn of unsustainable debt, around half of it owed by SMES, according to research from an industry taskforce which says failure to reduce this debt burden will risk their recovery from the Covid-19 crisis
TheCityUK Recapitalisation Group (RCG), which is supported by EY, calculates that in a year’s time small businesses could face an unsustainable debt burden of between £35bn-£40bn, with medium-sized businesses have between £16bn-£17bn of debt.
By the end of March 2021, while the majority of unsustainable debt will stem from existing debt, the RCG estimates that between £32bn-£36bn of the total unsustainable debt will stem from the government’s Covid-19 lending schemes; this is broadly a third of total projected lending resulting from the schemes.
The RCG’s analysis suggests that the sectors most exposed to unsustainable debt at this point are likely to be property (representing 24% of the total estimated unsustainable debt), accommodation & food services (16%) and construction (11%).
On top of the unsustainable debt, some sectors may be less able to weather short-term revenue shocks and will need support sooner than others. The RCG’s analysis suggests accommodation and food services, transport and storage, construction and business admin and support service sectors could be among those.
Miles Celic, CEO, TheCityUK, said: ‘SMEs are the engine of the UK economy. Lifting the debt burden from the shoulders of otherwise viable businesses will be essential to supporting a robust and sustainable economic recovery.
‘However, this is a huge and complicated challenge. It is already clear that there won’t be a one-size-fits-all solution. We need a range of viable options, which, between them, can help to support the unique needs of those SMEs, and the many different types of investor who could form part of the solution.’
The analysis suggests the recapitalisation needs of UK SMEs are particularly acute given the low volume of equity historically raised by SMEs (an average of £7.2bn a year between 2017 and` 2019).
Equity investment into UK corporates has typically focused on growth capital (versus capital for rescue or turnaround), with the vast majority of equity finance being channelled into London-based firms.
The report suggests enhancing the role of private equity and unlocking capital from UK insurers and pension funds could be among potential options.
In addition, a wide range of ideas for recapitalisation instruments have been considered. The current focus is centred on preferred equity, tax-based solutions, and forbearance. The RCG is now seeking feedback from businesses and a broad range of stakeholders on these potential options to help inform the next stage of the work.
Omar Ali, UK managing partner for EY financial services & chair of the RCG working group, said: ‘None of the options we outline neatly solve all of the problems faced by many businesses as a consequence of the pandemic, and that’s to be expected – if this were easy, there wouldn’t have been a need to set up the Recapitalisation Group.
‘We do however believe that if these options are developed appropriately, some could have a real and positive economic impact on individual businesses, protect jobs and help to restart the UK economy. There are still many questions to be answered before we reach firm conclusions, and we look forward to receiving feedback as we work towards our final recommendations.’
The RCG plans to publish its final recommendations in July.