Taking time off from writing my letters from the North I managed to do some work for my day job. During my busy week, I had some interesting face time with managers of second-level funding institutions.
These are participating in and advising on the Government protection devices attempting to keep the economy moving. One such scheme, the Bounce Bank Loan (BBL), advances companies up to 50,000 GBP with no interest or principal payments for the 1st year and then interest at 2.5% for 6 years. Early repayment is allowed with no penalty; the third-party lender is not allowed to secure the loan or take personal guarantees. The scheme gives the lender a full (100%) government-backed guarantee against the outstanding balance of the facility (both capital and interest). This guarantees the loan principal and interest during the period of the loan. The loan is to a maximum of 25% of the turnover of the company. The company remains liable for the loan, but as said, it isn’t secured.
This has been successful with a huge take-up and has proved a lifeline to many SMEs (Small and Medium Enterprises). It is easy to apply and loans have been paid out in as little as a 24-hour turn round.
As at 7th July 30.93 billion GBP had been loaned under this scheme. It also revealed that businesses have benefitted from 53,536 loans worth over £11.4 billion through the Coronavirus Business Interruption Loans Scheme (CBIL), 394 large businesses have benefitted from £2.58 billion via the Coronavirus Large Business Interruption Loan Scheme (CLBIL), and over £379 million has been invested in 376 companies through the Future Fund.
Source HM Treasury 7 July 2020
We now apply the law of unintended consequences. The Office for Budget Responsibility thinks that only 10% will be impaired (ONLY!) and this includes other loans intended for larger companies (eg CBIIL and CLBIL). The finance companies I have been speaking to seem to think that the figure for the bounce back loans will be closer to 25% by value.
The problem then will be how to treat these defaults. The Government have guaranteed the loans, but it is still the responsibility of the lender to pursue the defaulter for payment. This could be a costly and time-consuming exercise, and how will the Government assess whether the lenders have made sufficient efforts at recovery before coughing up on the guarantee? If the lenders pursue it through normal debt collection procedures it will be time-consuming and costly in terms of actual expense and management time spent on the impairments. They forecast that there will be a huge increase in companies employing insolvency procedures such as administration or liquidation. Already the list of administrations circulated by Insolvency Professionals is growing due to companies not being able to continue as a result of COVID-19, even before the impact of loan defaults is felt.
Unintended consequence number 2: – Any insolvency procedure must be carried out by a Licensed Insolvency Practitioner. The fear is that the volume of such procedures will overload the capacity of the IP industry’s ability to cope with such volumes. This could result in IP procedures and investigations being skimped, directors’ actions not being fully assessed, and the administration just signed off after statutory responses and declarations are made by the directors.
If a company goes into administration having over-extended its debt by taking on the BBL then it will still be liable for any existing liabilities, many of which may be held by the second-tier lenders who also have the default loan under BBL. They are very nervous but have had to participate to comply with Government requests and avoid informal pressure and penalties.
It is a recipe for a potential mess of the highest order and will need careful monitoring. One has to consider the impact of this situation on the money supply for future lending, without which the economy will take much longer to recover. Of course, we must not ignore the impact on the tax take from these defaulting companies. This will put the Government’s own borrowing under further stress if the forecast tax take does meet the amount required in its loan servicing plans.
Fingers crossed!
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