State-backed coronavirus loans should be repaid only when business borrowers turn a profit, a think tank has warned.
One in five companies are now “zombies”, with profits that scarcely cover their debt interest payments — and one in 23, employing a total of 1.8 million people, are technically insolvent with liabilities greater than their assets, according to Onward.
Debt levels leapt during this year’s lockdown as companies tapped the government’s emergency loan schemes to meet costs, leaving many overburdened with debt. About £53 billion has been loaned to small and medium-sized businesses and The City UK, the finance industry lobby group, has estimated that £35 billion may not be repaid.
The researchers at Onward fear a so-called balance-sheet recession, in which companies prioritise debt repayment over growth and investment. To keep the recovery on track, they have called on the government to convert the debt into “income-contingent loans” that do not need to be repaid until companies become profitable.
Repayments could take the form of a “tax surcharge” on top of corporation tax, using a model similar to the student loan scheme, under which repayments start only once a salary threshold is passed. Onward did not suggest a repayment interest rate.
Angus Groom, an Onward fellow and author of the think tank’s report, said: “The government’s loan schemes have been highly effective at helping firms through the worst of the crisis, but they represent a double-edged sword in that they have weighed down firms with debt just as we need them to invest to spur the recovery. The chancellor so far has appeared reluctant to consider restructuring the newly issued Covid debt. [This] scheme gives the option to intelligently delay repayments only for those firms who need it.”
Under the coronavirus business interruption loan and bounceback loan schemes, the government guaranteed between 80 per cent and 100 per cent of the debt but will cover the losses only once banks, through which the loans have been made, make concerted efforts to recover the money first.
How the debt should be restructured to avoid becoming a drag on growth is a key issue for the Treasury. Proposals have included debt-for-equity swaps and outright debt forgiveness, but Rishi Sunak is said to be reluctant to leave the taxpayer with the liabilities.
Onward, which has several Conservative MPs and peers on its board and was founded by a former adviser to Theresa May, said that making the loans income-contingent — to be repaid once companies were profitable — was a better approach “by automatically delaying repayments to such a time as they are affordable, allowing the company to focus on recovery”.
Onward found that the government support schemes, including furlough, had prevented 350,000 companies — or 12 per cent of the total — from running out of cash and going bust, costing a total of five million jobs. It said that as many as 4 per cent of companies had been “zombified” since March, taking the total to 21 per cent. In the worst-hit hospitality and arts and recreation sectors, 40 per cent of companies were zombies, Onward estimated.