One in five businesses in Britain are “zombie firms” struggling to stay afloat after a boom in company debt levels during the coronavirus pandemic, an influential Tory thinktank has warned.
Calling on the chancellor, Rishi Sunak, to use the autumn budget to launch a debt relief scheme for firms, the Onward thinktank said crippling levels of debt built up during the crisis would hamper the UK’s economic recovery.
Onward, led by a former senior adviser to Theresa May – and with close links to the Treasury and an advisory board packed with Tory grandees – said debts built up during lockdown could push 4.3% of UK firms – employing 1.8 million people – into technical insolvency.
It said a debt relief scheme should be used to allow firms to pay down state-backed loans taken on during the crisis gradually, via a surcharge on profits and shareholder payouts. It would depend on a firm’s income levels, similar to the student loan system for tuition fees.
After lockdown brought business and social life close to a standstill this spring, plunging the UK economy into its deepest recession on record, more than £52bn has been borrowed by UK firms, using state-backed emergency loans.
Onward said the rise in debt levels meant as many as 20% of UK companies were now “zombies” – meaning their profits only just cover the ongoing cost of their debt interest payments. It said firms weighed down by debt would be less likely to invest to spur Britain’s economic rebound from the pandemic.
The intervention comes as banks ramp up their debt advisory teams to cope with a flood of company insolvencies triggered by the pandemic. HSBC UK plans to almost triple the size of its debt management team by the end of the year to steel itself for a surge in defaults.
The bank’s financial hardship team, which deals with businesses and individual customers who have fallen behind on loan, credit card or mortgage repayments, has already doubled in size to 800 staff since the UK lockdown in March.
“We will probably go above 1,000 before the end of the year,” Stuart Haire, HSBC’s head of retail banking and wealth management, told the Guardian.
Staff will go through mandatory training on how to deal with vulnerable borrowers and some of them will be coached on how to approve a broader range of forbearance options for customers who might otherwise struggle to repay debts. A number of “specialists” will also be on hand to deal with more complex cases.
Lloyds is shifting as many as 600 staff who previously dealt with payment protection insurance (PPI) mis-selling claims to a financial hardship team.
NatWest has increased its 1,000-strong debt management team to 1,650 since March, while Santander has added dozens of staff to its personal and commercial debt management units.
The UK’s top four lenders have put aside a collective £15.6bn in Covid-related loan provisions – money to cover a potential default – so far this year. HSBC ring-fenced $3.8bn (£2.9bn) in the second quarter alone, $1.5bn of which related to its UK business. Lloyds put aside £2.4bn to cover bad debts in the second quarter.