Treasury to reject city’s coronavirus loan refinancing plan
The Treasury is said to be set to reject a City of London plan for a new public organization that would refinance the billions of pounds in emergency coronavirus loans on loan to UK businesses.
Chancellor Rishi Sunak to reject plans proposed by a group led by trade body The City UK and audit firm EY to create a public body to deal with the expected backlog of corporate debt using state-guaranteed loan programs, The Financial Times reported.
The ministers are said to have opposed the group’s recapitalization plans which they believe could shift the risk of default on bank loans to tax papers.
Loans through the government’s main coronavirus loan programs topped £ 52 billion.
By far the most widely used has been the Bounce Loan Program (BBLS), under which the government backs 100% of loans up to £ 50,000. Treasury figures showed £ 35.5 billion had been loaned under the program as of August 16.
The coronavirus business interruption loan program (CBILS) saw banks lend £ 13.7bn to struggling companies. Still, the approval rate remains below 50 percent, with 122,900 applications and 60,400 loans.
CBILS allows banks to lend up to £ 5million to businesses. The government supports 80 percent of the loans.
According to the FT report, the Treasury believes banks should face the cost of reputation and the risk of default on loans linked to the coronavirus.
One of the reasons for this is the belief that corporate debt levels were relatively low before the crisis hit.
Appearing before the Treasury Select Committee in July, Sunak said, “I am not completely convinced of the extent of the problem at the moment, I think the simple reason is that we know that corporate debt levels in the world. UK are relatively healthy. get into this crisis.
Under the City UK program, the new body would be able to convert coronavirus loans into new financing instruments, which would give businesses more time to repay the money.
Banks fear they will face a wave of defaults from companies unable to repay their loans.
Miles Celic, Managing Director of The City UK, said: “Our industry, as well as independent organizations, is clear that there will be an unsustainable debt burden that will weigh on hundreds of thousands of businesses.
“For some companies, this debt will sink them – the OBR estimates that up to 40% of companies that have taken out BBLS loans will not be able to repay them.
“We continue to have valuable discussions with the government and others to identify the best way to tackle this increasingly urgent problem.”
The Treasury declined to comment.