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Defaults on business covid loans could reach £22bn

Almost a third of coronavirus business interruption loan scheme (CBILS) and bounce back loan scheme (BBLS) loans, amounting to £22bn, will go into default, claims ACP Altenburg Advisory

The debt advisory specialists state that the initial estimates from the Office for Budget Responsibility (OBR) will be correct and that the defaults will reach £22bn, which would be around 30% of the £73.7bn delivered through the two schemes in total.

The overall figures for each covid support measure delivered £26.39bn through the coronavirus business interruption loan scheme and £47.36bn through bounce back loans.

The latest figures also show that the coronavirus job retention scheme (CJRS) paid out £68.5bn up to 16 August of this year.

The end of the furlough scheme will enhance the strains on cash flow which will almost certainly cause higher levels of loan deferral, with many businesses also needing to find additional cash to repay deferred VAT.

ACP Altenburg said that the short-term options that are already available for businesses do not help prevent the deferral of payments.

The government’s Pay as you Grow scheme, which allows companies to take a six-month payment holiday on their BBLS payments, is not available for CBILS borrowers and could possibly impact businesses’ ability to obtain funding in the future as the scheme only delays repayments.

Dan Barrett, partner, ACP Altenburg said: ‘We may see billions in CBILS and BBLS loans default and the Pay as you Grow scheme for BBLS loans may only delay, rather than reduce the overall level of defaults. Businesses who are worried about their repayment obligations should be considering their options and seeking advice.

‘Businesses looking for funding to grow or acquire need to consider that many lenders are extremely busy as the market is seeing an upsurge in activity, and many lenders are still getting to grips with the vast amount of money they lent under CBILS and BBLS.’

One option for businesses to avoid defaults is to consolidate all existing borrowings into a new facility, with the repayment terms reprofiled to meet the forecast cash flow generation of the business.

Businesses looking for additional funding may be better off refinancing existing BBLS and CBILS debt into the new debt facilities. However, the firm states that raising additional debt alongside BBLS and CBILS debt ‘can be complex’ as the original debt will require an intercreditor agreement to be negotiated between the BBLS and CBILS funder and the new funder.

Another option is to refinance the CBILS and BBLS debt with an asset-backed debt package.

The firm states that lending against assets could allow borrowers to obtain higher levels of funding as the value of their assets is also taken into consideration in determining the amount that they can borrow, rather than just the cash flow generation of the business.

Linking borrowing to assets can also minimise the loan repayment obligations during the term of the loan if the value of the assets providing the security does not significantly reduce over time

 

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