Companies backed by private capital can now access emergency financing under the UK government’s new COVID-19 loan program, but industry critics argue the support does not go far enough.
The new plan, which is due to be launched on Monday, builds on a previous program, the Coronavirus Business Interruption Loan Scheme, by removing a limit on businesses generating revenues of more than £ 45million (around $ 56million). PE holding companies were generally not eligible for loans in the original initiative, as lenders consolidated revenue in the companies’ portfolios. Private-funded companies also had to consider financing alternatives before being allowed to apply.
In the financing program, the government provides an 80% guarantee on each loan offer by selected lenders through the state corporation. British Investment Bank, rather than lending directly. Eligible businesses can apply for up to £ 25million in funding, while those with turnover in excess of £ 250million can borrow up to £ 50million. Jim Shaw, partner of the British law firm Shaw & Co., who advises PE clients, said the program requires lenders to take a substantial risk and that many will be uncomfortable lending to certain businesses under existing criteria.
“The UK government is trying to solve this problem at the lowest possible cost to itself,” Shaw said. “[The program] is political laundering to cover up that they are unwilling to put the UK’s record on the line and bear the costs necessary to support the economy. “
For small and medium-sized businesses to get the support they need, Shaw believes the UK needs to guarantee the entire loan in order to mitigate credit risk for lenders, such as in the US, where the Reserve Federal government launched a loan of $ 2.3 trillion. program, which covers all loans granted to these companies. In the United States, however, some have argued that the program is more open to exploitation.
For his part, Patrick Magee, commercial director of the British Business Bank, said companies owned by PE are particularly vulnerable as they tend to have higher levels of debt. If companies find themselves in trouble, lenders will be forced to provide more financing and shareholders, who are even more exposed, are unlikely to invest more capital. That is why the government must share the risk.
“We put a catalyst in there to move lenders forward, and it allows for a more constructive discussion between shareholders and debt holders to say that we can come to a situation here where we can provide capital and the right mix. ,” he said.
Although the initial program was launched in March, only 6,020 loans worth a total of £ 1.1 billion had been made as of April 13, despite nearly 28,500 formal requests. Magee blamed the delay on the banks’ extensive due diligence processes, but some believe that is not fit for purpose.
Shaw maintains that many businesses that were viable before the COVID-19 crisis will be stranded because they pose too much of a risk in the current climate. He noted that under this new loan plan, businesses are more likely to obtain financing as they are able to provide more collateral and security.
He added, “Just like the irony of the loan. If you need the money you can never get it, and if you don’t have it you can. And nothing changes.”
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