Many UK firms that have taken on loans using government support schemes during the coronavirus crisis will recapitalise their debt by using corporate insolvency processes, according to private equity titan Jon Moulton.
“Some of it’s going to get recapitalised the hard way, known as corporate bankruptcy. I think that number is going to go up quite sharply over the course of the next year, and may persist into the future,” Moulton told the Treasury Select Committee of the House of Commons on Wednesday.
Moulton, the founder and managing partner of private equity firm Better Capital, said the extent to which firms entered bankruptcy would depend on the strength of the economy and future interest rates.
If interest rates rose sharply, Moulton warned that the number of UK firms defaulting on their debts could surge.
As of 14 June, businesses had borrowed £10.1bn ($12.6bn) through the coronavirus business interruption loan scheme (CBILS), which is 80% guaranteed by the government.
Others had borrowed £1.7bn through the coronavirus large business interruption loan scheme (CLBILS), which is also 80% guaranteed by the government.
Smaller firms have raised £23.7bn through the Bounce Back loan scheme, which is 100% guaranteed by the state.
Firms have separately raised tens of billions using the Bank of England’s Covid Corporate Financing Facility, which is also state backed.
“We have no idea of the magnitude of the difficulty here. If we assume that interest rates remain low, then the difficulties will be low. If interest rates creep up over the course of the next three or six years, then you could have very very much greater levels of default in the numbers,” Moulton said.
Calling it a “very crude” approximation, Moulton pointed to suggestions that UK firms may be saddled with £100bn in “dodgy-looking” debt in a year’s time. “It could be a lot worse than that in time,” he said.
Moulton suggested a number of ways of tackling the debt, noting that a low interest rate environment could allow firms to hold onto their debt for a long period of time.
He said other firms could try and convert their debt into equity “in a variety of ways,” or the government could even make loan repayments an additional corporate tax on profits.
“It’s quite a complex idea, but at least it’s novel. But the scale of the problem is going to be enormous unless we have a very very good strong economy and very low interest rates.”
“There is every reason to be concerned about it,” Moulton said.