UK finance sector devises battle plan to tackle COVID debt pile

By Sinead Cruise and Iain Withers

LONDON, July 16 (Reuters) - More than 200 of Britain's top
financial experts have joined forces to design initiatives to
help small businesses restructure and repay as much as 35
billion pounds ($44.1 billion) in "unsustainable" COVID-19
relief debt.

TheCityUK Recapitalisation Group on Thursday proposed the
launch of a UK Recovery Corporation (UKRC) to oversee a massive
pile of government-guaranteed loans issued since lockdown,
offering more manageable terms to borrowers and preventing a
wave of bankruptcies borne by the taxpayer.

"COVID-19 is a 100-year storm which has caused untold
economic damage. The government's support schemes have been the
essential sandbags holding back the flood, protecting businesses
and saving jobs," said Adrian Montague, chairman of TheCityUK
Leadership Council.

"However, with tough trading conditions forecast to remain,
paying back these loans will be challenging for many small and
medium-sized businesses (SMEs)."

Businesses currently need to start repaying government
COVID-19 loans in March.

But analysis by financial services firm EY - which led the
work for the Recapitalisation Group - suggests some firms could
run into trouble as early as autumn, when the government
furlough scheme tapers off and rent deferrals end, putting up to
3 million jobs at risk and 780,000 SMEs in danger of insolvency.

The report urged immediate action by government including
legislating to enable UKRC to act effectively.

A spokeswoman for the Treasury said the report was a useful
contribution and the department would continue to engage with
the sector on supporting businesses.

Under the proposals, the government would be the principal
investor in UKRC initially but debt could later be sold off in
portfolios or securitised and bought by private investors.

Companies supported by the UKRC could either access a
'Business Repayment Plan' to convert state-backed loans under
250,000 pounds into means-tested tax liabilities.

Firms with larger debts of up to 1 million pounds would be
able to access the 'Business Recovery Capital' initiative to
convert crisis loans into preference shares or long-term
subordinated debt, repayable over a longer period of 8-10 years.

Both products would ensure SMEs do not give up any equity.

The final option is the creation of a new growth capital
fund, Growth Shares for Business (GSB), which would provide
capital to rebuild cash reserves or spur recovery.

Miles Celic, chief executive of TheCityUK, told reporters
banks were mindful of the potential reputational risks involved
in pursuing bad debts from struggling firms but said a proposed
independent review system should help ensure fair outcomes.

Several lenders including state-backed Royal Bank of
Scotland were criticised by politicians for mistreating
struggling small businesses after the 2007-09 financial crisis.

EY's UK Financial Services Managing Partner Omar Ali said
the recovery corporation could help collect debts over the
longer term, adding it was ultimately up to the government to
decide the viability criteria for the various schemes.

($1 = 0.7938 pounds)
(Reporting by Sinead Cruise and Iain Withers; Editing by Nick
Macfie)