Covid-19 | Impact of Debt | Rosenblatt’s Financial Crime Team
3rd November 2020
Earlier this month credit ratings agency Moody’s downgraded the UK’s sovereign debt credit rating from Aa2 to Aa3 with the impact of Covid-19 a key factor in the decision. In June the International Monetary Fund forecast that the overall gross public-debt-to-GDP ratio of advanced economies would rise from 105% last year to 132% by 2021. This negative outlook is reflected in the mounting debt taken on by individuals and businesses as a result of the various relief schemes offered by the government.
Paths to Debt | Rosenblatt’s Financial Crime Team
The following short-term relief schemes remain open:
The Coronavirus Business Interruption Loan Scheme enables eligible SMEs with an annual turnover of no more than £45m to obtain loans of up to £5m for up to six years. The loan is in the form of a government grant that covers the first 12 months of interest payments and fees and guarantees 80% of the loan itself. Businesses also need to show they would be viable were it not for the pandemic and that they have been adversely impacted by Covid-19. For larger businesses with a turnover of more than £45m, a similar scheme is available enabling borrowing of up to £200m.
The Bounce Back Loan scheme allows small business affected by the pandemic to borrow up to 25% of their turnover, up to a maximum of £50,000, with no repayments or interest due for the first 12 months with the subsequent interest rate set at 2.5%. The government guarantees 100% of the six year loan term. The National Audit Office has already estimated that this scheme could result in between £15bn and £25bn never being paid back.
For innovative UK companies relying on equity investment the Future Fund is providing government loans from £125,000 up to £5m. These companies must have raised at least £250,000 from investors in the last 5 years and have no shares traded on a regulated market or other listing venue. They must also have at least half of their employees based in the UK or raise at least half of their revenues from UK sales.
A Covid-19 Corporate Financing Facility has also been set up by the Bank of England, in which the Bank will purchase short-term debt from large companies that make a material contribution to the UK economy.
Corporate Legislation | Rosenblatt’s Financial Crime Team
The necessary but clearly unattractive outcome in preventing economic disaster brought on by the pandemic is a debt-ridden economy and private business sphere. However, this may be softened somewhat by the provisions of the UK Corporate Insolvency and Governance Act 2020 (CIGA).
Temporary measures such as restrictions on statutory demands and winding up petitions have been intended to stave off short-term mass insolvencies, but the Act also introduces new permanent restructuring measures. One of these is provision for a restructuring plan based on schemes of arrangement set out in the Companies Act 2006 but with the ability for a company to bind a class of creditors to a restructuring plan even if not all creditors have voted for it. Similarly, CIGA allows companies to obtain a moratorium to provide a payment holiday for certain debts and prevent enforcement of such debts and insolvency proceedings. The intention is to give companies in difficulty time to consider their options. A supplier to a company subject to an insolvency process will also no longer be able to terminate the supply contract as a result, again to aid the potential recovery of the company.
As the impact of Covid-19 will be potentially felt for years to come the permanent aspects of CIGA are a significant development in the battle for economic stability.
Rosenblatt can help
Rosenblatt has a wealth of experience in financial crime and is uniquely placed to support client’s crime needs during these unprecedented times, consistently ensuring a familiarity with the ever-changing Government guidance on COVID-19.