UKs rebooted business rescue meets a wall of waiting and pain

Ever since Rishi Sunak, the U.K.’s chancellor of the exchequer, unveiled a plan to save small businesses from bankruptcy two weeks ago, potential recipients of the aid swarmed social media to vent their frustration. They’ve said the program is too complicated, too slow, and too mired in red tape to get them the financial relief they so desperately need. So when word emerged Thursday that Sunak was preparing an overhaul of the Coronavirus Business Interruption Loan Scheme ("CBILS), hopes ran high that a reboot would iron out the problems.  It looks like a lot of people are going to have to manage their expectations.

"The changes were a step in the right direction, but overall I found the package to be underwhelming," said Jim Shaw, a partner at Shaw & Co, a corporate finance firm in Bristol that works with small enterprises, "We are left with a number of structural challenges."

CBILS was initially designed to help firms with less than £45million ($55million) in annual revenue obtain emergency loans of as much as £5million from approved lenders.  The Government covers 80% of the risk and picks up the tab for 12 months of interest and fees.  The package was created by the Treasury Department in co-ordination with UK Finance, the banking industry's trade association and the British Business Bank ("BBB"), a state-owned organisation that specialises in providing funding to small and medium-size companies and administers the program.  CBILS has received 130,000 applications so far but has approved only about 1,000 loans totalling £90.5 million.

Banking bottleneck

Andrew Potter, a small business owner in central England who banks with Royal Bank of Scotland Group Plc and Metro Bank Plc said he's been bounced from phone calls to chat rooms and back to phone calls only to be told a banker will ring him back in five days.  Metro finally responded but he's still waiting on RBS.  What truly riles the small businessman is that he's been a customer of both banks for years.

"If a bank knows your income and your business it should be able to nod the loan through in an emergency situation like this, especially when it has so little exposure because of the government's guarantee," Potter said.  "But the banks have been hopeless and we don't have the waits to wait for them - one of my businesses is down 60% and the other is completely gone."

Sunak responded to the criticism on Thursday night by modifying CBILs which is part of his broader £330 billion economic rescue package.  Lenders will no longer be permitted to require business owners to guarantee loans less than £250,000 with personal assets such as second homes, cars or securities (primary residences had already been excluded).  The Chancellor also asked lenders to green-light loans greater than £250,000 even if borrowers cannot muster sufficient collateral and banks won't be required to make companies apply for conventional loans prior to requesting a CBILS facility. 

"That should enable more borrowers to be eligible for this scheme," Keith Morgan, chief executive officer of the British Business Bank said in an interview.  "Small and medium-sized businesses expect us to be responsive to the situation and two weeks into the process we are removing barriers."

The UK is not the only country making a rocky start to its business relief effort.  Friday  as the first day of the US effort and Wells Fargo & Co and JP Morgan Chase & Co both said they were not yet ready to accept applications.  Germany is weighing whether to launch an additional guaranteed lending program to its small businesses to strength its initial measures.

Time is rapidly running out to throw a lifeline to many of the UK's six million small companies, which account for three out of five jobs and generate half the total annual revenues in the private sector, according to the Federation of Small Businesses.  On 31 March the end of the quarter, hundreds of commercial tenants in shopping centres across the UK failed to pay their rents said Mark Phillips a bankruptcy lawyer at South Square Chambers in London.  He's so concerned about the scale of insolvencies on the horizon that he's working with his industry peers and regulators to assemble a team of insolvency experts to help companies handle administrations.

As the key players in CBILS the banks - especially the Big Four of HSBC Holdings plc, Barclays plc, Lloyds Banking Group plc and RBS - are facing their biggest test since the global financial crash of 2008.  Rather than creating a crisis the banking industry is now being asked to help contain a national emergency.

So far, reports from the underwriting trenches depict an industry overwhelmed by the demand for financial lifelines.  Some lenders are charging double-digit interest rates according to borrowers and lenders.

Bailout reminder

Even when companies do manage to submit an application they're often frustrated.  Tim Fisher a consultant to a British manufacturer called Tufnol Composites Ltd said RBS rejected his application for a £250,000 loan because the firm does not make a profit.  Fisher wrote a letter to RBS CEO Alison Rose to point out that the loan would help pay for the company to make parts for hospital beds for the NHS.  "I wanted to reminder that that no long ago we bailed her bank out,"  Fisher said, referring to the nationalisation of RBS during the crash of 2008.  A spokeswoman for the lender said the loan application is under review but Tufnol is one of many companies that may not be suited for taking on more debt.  Making those kind of tough calls in such a stressful time might be necessary for the bank, which needs to protect its own balance sheet from unnecessary risk.  Not every company is going to be eligible for CBILS she said.  Last week, Sunak warned Parliament that its unrealistic to expect that every firm or job can be saved in the crisis.

Anxiety is mounting that companies that can't qualify for CBILS have few places left to turn.  Over the last two weeks, thousands of small business owners have bombarded Funding Options Ltd, a London-based loan broker, with applications.  Yet the web-based firm is struggling to find takers to finance the borrowing.

Moral argument

"Demand has been stratospheric but we are seeing lending come to a standstill," said Simon Cureton, CEO of Funding Options.

BBB CEO Morgan said a new crop of lenders are poised to join the 40 firms already participating in CBILS, which should expand the program's reach and he added that Sunak's changes should speed up the application process.  

Yet skeptics had hoped the Chancellor would follow the lead of the US and provide a 100% guarantee on loans to smaller firms instead of just 80%.  That would allow banks to rapidly process and distribute financing because they would not have to worry about lending risk.  Shaw says Sunak has to take a deep breath and let the state backstop all the risk in the program, as it essentially did for the banks in 2008.

"There is a moral argument to be made here," Shaw said.  "We may need to offer the national balance sheet to the country or else the cash isn't going to get out quickly enough and the damage will be done."

www.bloomberg.com
4 April 2020

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