Jon Moulton, founder and managing partner of private equity firm Better Capital, has said that UK corporate bankruptcies could rise sharply in the next year in an appearance before the Treasury Select Committee. Moulton also used the appearance to say the government’s Future Fund COVID-19 support package for start-ups is “badly flawed” and should be scrapped.
Speaking before the Treasury Select Committee on Wednesday June 17, Moulton asserted that many UK firms that have taken on loans through the government’s various coronavirus support schemes will look to recapitalise their debts through corporate insolvency processes.
“Some of it’s going to get recapitalised the hard way, known as corporate bankruptcy. I think that number is going to go up quite sharply over the course of the next year, and may persist into the future,” Moulton said, adding that the economy and future interest rates would determine the extent of bankruptcies. He warned that a sharp interest rate rise could see a surge in UK firms defaulting on debts.
“We have no idea of the magnitude of the difficulty here. If we assume that interest rates remain low, then the difficulties will be low. If interest rates creep up over the course of the next three or six years, then you could have very very much greater levels of default in the numbers,” he said.
The Coronavirus Business Interruptions Loan Scheme (CBILS), which provides 80 per cent-government backed loans, has lent £10.1 billion to businesses as of June 14. The equivalent scheme for large businesses, the Coronavirus Large Business Interruption Loan Scheme (CLBILS), has seen loans of £1.7 billion.
The 100 per cent-government backed Bounce Back loan scheme for small businesses has handed out £23.7 billion, while the state-backed Bank of England COVID Corporate Financing Facility has also seen UK firms raise tens of billions.
According to Moulton, this could see UK businesses carrying £100 billion of “dodgy-looking” debt a year from now, although he cautioned that “[i]t could be a lot worse than that in time”. Describing the scale of the problem as potentially “enormous”, Moulton suggested that low interest rates could help firms hold onto their debts for longer, that firms could convert their debts into equity and that the government could explore the possibility of making loan repayments a corporate tax on profits.
Moulton also launched an attack on the government’s £500 million support package for innovative and start-up businesses – the Future Fund. Saying it should be closed, Moulton called the scheme “very poor” and “badly flawed”. The fund, through which an initial £250 million has been made available, was launched on May 20 and allows UK-based start-ups to apply for loans of between £125,000-£5 million.
According to Moulton, revenue represents “a small component of their funding. So actually fast-growing, little companies were the least affected by the coronavirus and they’re operating in a world where there’s a monstrous amount of private capital. The Future Fund seems to me to be, one, barely necessary and, two, just crowding out what is some £10 billion of dry powder as they call it — unspent private equity — to invest in growing businesses in London.”
Responding to a question from Conservative MP Steve Baker, Moulton said that government schemes were “crowd[ing] out private money that wants to do it”. “That doesn’t seem like what we should be doing in a crisis,” he added.
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