Coronavirus could create £105bn debt black hole for smaller UK firms

Edmund Heaphy
Finance and news reporter
Many UK businesses have been put into suspended animation until they can safely reopen. (Getty)

The coronavirus pandemic could saddle small and medium-sized firms (SMEs) in the UK with more than £100bn ($124bn) in “unsustainable” debt by March 2021, the Bank of England has been warned.

A preliminary assessment revealed that UK private, non-financial businesses could be forced to contend with an unruly debt pile of between £90bn and £105bn within a matter of months, financial services industry lobby group TheCityUK said.

In a letter to Bank of England governor Andrew Bailey, the group warned that businesses could require wide-ranging debt recapitalisation so that they can counteract the blow to employment resulting from the crisis.

READ MORE: European stocks rise after uptick in cases dents Asian markets

Loans handed out under the government’s Coronavirus Business Interruption Loan Scheme, which provides financial support to smaller firms who have lost revenue during the crisis, could account for as much as £20bn of that debt pile, according to the analysis.

“The economic lockdown created by the pandemic has required unprecedented interventions. Businesses have been put into suspended animation until they can safely reopen,” said Miles Celic, chief executive of TheCityUK.

These businesses employ over 16 million people and account for revenues of more than £2tn, Celic told Bailey.

Firms may also need to raise new equity to address the unsustainable debt levels, the group said.

The levels of unsustainable debt, if left unresolved, could inhibit employment, research and development, and investment, and delay the country’s economic recovery, it warned.

READ MORE: 7.6 million UK jobs are at risk because of the coronavirus lockdown

Noting that private equity investment into SMEs was £6.7bn in 2018 and that bank lending flow to such firms was £57bn last year, TheCityUK said that “significant volumes of new, appropriately structured capital” would likely be required to support UK businesses.

“More work is required to identify the extent of the capital that the private sector can provide, and its suitability in the current circumstances for the different sectors and types of company in the economy,” Celic wrote.

“Our industry is, simply, determined to do what it can to further and support the national response to this crisis.”