It is now well documented the financial support that was eventually made available to business in the form of the Bounce Back Loan Scheme and the Coronavirus Business Interruption Loan Scheme. This was further supported by the VAT Deferment Scheme and the suspension of Landlord enforcement against unpaid rents, supported by mortgage repayments holidays and other local schemes and self-negotiated deferral arrangements. All this was designed to support our economy during the very worst of the crisis.
But at what cost?
The loans need to be repaid early next year. The Vat Deferment scheme has now ended and payments will need to be made. Landlords will be asking for back rents. All this is at a time when business is just coming out of a coma and does not yet have the free cash flows to support the payments. So have we just deferred the pressure pot of unsustainable Debt?
Summary of the loan schemes
Bounce Back Loan Scheme (BBLS)
The scheme helps small and medium-sized businesses to borrow between £2,000 and up to 25% of their turnover. The maximum loan available is £50,000.
The Government guarantees 100% of the loan and pays the interest for the first 12 months. After 12 months, borrowers will pay the interest rate of 2.5% a year. The borrower does not have to make any repayments for the first 12 months.
Coronavirus Business Interruption Loan Scheme (CBILS)
The scheme helps small and medium-sized businesses to access loans and other kinds of finance up to £5 million.
The Government guarantees 80% of the finance to the lender and pays interest and any fees for the first 12 months.
Thoughts form the Banking World
Bankers warn the Treasury to expect 40-50% of Bounce Back Loans to be written off, while RBS boss Howard Davies calls for bad debt sinkhole for loan defaults
Three senior bankers have warned that between 40 per cent and 50 per cent of the 608,000 borrowers who have taken out £18.5bn of Bounce Back Loans could eventually default on the debt.
Will this lead to some 300k of future insolvencies? I doubt we will see this tsunami but for sure a proportion will fall over. There will definitely be a need for restructuring of business and of debt. Those businesses that are adept to risk management will be taking corrective action for survival and business plans will be revamped.
Now is absolutely the time to revise the financial forecasts and get into a ready mode to respond to the need to repay monies whether to the Government, the landlord or the banks.
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More Business support comes with The Corporate Insolvency and Governance Act 2020. This has introduced a new standalone moratorium procedure for companies.1 The moratorium is part of a package of significant legislative reforms contained in the Act, intended to enhance the UK’s restructuring rescue culture. These were originally consulted on between 2016 and 2018 and were fast-tracked to deal with the COVID-19 pandemic. It will provide 20 days of protection enabling the restructure of either the business or the debt.
The moratorium is a director led process which leaves the directors in situ to trade the company with an insolvency practitioner acting in the role of “monitor” overseeing the company’s affairs. The aim is to afford companies some breathing space from creditor action to formulate a turnaround plan without adding significant costs. The moratorium is focused on the recovery of the company rather than the realisation of its assets. This change in focus may be essential as lockdown guidelines ease and the economy is kickstarted. Businesses are sure to need some time to get back up to speed and reconfigure following the effects of months of limited trading. The Act includes some temporary concessions to the rules to enhance access to the moratorium and help facilitate business recovery.
The moratorium provides 20 business days protection from certain creditor action. It can be extended for a further 20 business days without any consent, or for longer with consent of the pre-moratorium creditors or the court. Early termination is also possible. The moratorium is broadly similar to the administration moratorium, and includes restrictions (among others) on insolvency proceedings, enforcement of security, and forfeiture.
The monitor must be, and remain, of the view that a rescue of the company will be possible. If the monitor is no longer of the view that rescue is possible the moratorium must end.
During the moratorium, the company must continue to pay certain debts including newly incurred liabilities, payments for new supplies, rent in respect of the moratorium period, certain payments due to employees, and debts under financial contracts, including lending contracts. If those debts are not paid, the moratorium will end. Support from lenders will therefore be required. The provisions for payment of rent may also cause some issues, as explored further below.
There is also provision for a slightly narrower category of debts to be given priority in an insolvency occurring within 12 weeks of the end of the moratorium. This aspect of the moratorium was the subject of much debate and some significant amendments in the House of Lords as the Bill made its way through the parliamentary process. There were concerns that accelerated financial debts could be given this super priority status, but amendments in the House of Lords have sought to deal with that issue. (Ref: DLA Piper)
There are of course eligibility criteria and the monitor comes at a cost. Completing the business plans and the financial projections of course are critical to this.