The UK government is trying to find a way to offer state-guaranteed loans to indebted companies belonging to private equity groups, in the hope of saving part of Britain’s main street.
The Business, Energy and Industrial Strategy (Beis) department wants to help private equity-funded groups that employ large numbers of people, like PizzaExpress, Prezzo or Merlin, the owner of Legoland, without breaking EU rules by state aid, according to four people involved in the process.
They warned, however, that there was no guarantee the government would find a solution.
PE-backed companies are typically indebted to reduce their tax bill, resulting in statutory losses even when generating cash.
Therefore, they were unable to apply for emergency coronavirus loans, as EU rules state that companies with losses exceeding 50% of their registered capital are not eligible for government support.
Opening up access to loans, which are worth up to £ 200million and come with a guarantee that the taxpayer will repay 80% in the event of a business going bankrupt, is said to be controversial.
PE groups often leave their portfolio companies with only a thin financial cushion to weather economic downturns, and the industry is currently sitting on a record $ 2.5 billion in dry powder that is waiting to be invested.
“Policymakers are rewarding excessive debt levels at all levels since the financial crisis, with quantitative easing,” said Peter Morris, associate researcher at the Said Business School at Oxford University.
“But private equity firms and their supporters often talk about the virtues of so-called ‘debt discipline.’ It seems difficult to reconcile this with the acceptance of handouts from taxpayers, ”he added.
The UK government is concerned about jobs, with nearly 750,000 jobs lost since the start of the crisis. Industry lobby group BVCA says companies in which the private equity and venture capital sectors invest represent more than 840,000 jobs.
“We are aware of the problem related to the possibility for certain companies to access[the loans]. . . and continue to explore if something more can be done to support these businesses, ”a government spokesperson said in a statement.
Private equity groups want the government to give explicit guidelines to banks to allow them to ignore or reinterpret the debts that companies typically owe their owners, to reassure lenders that they will not be exposed to financial hardship. payment defaults.
“This has been the subject of a lot of dialogue at the industry level,” said a senior banker at a high street bank. “Their guidelines already give a lender the discretion to treat shareholder loan notes as equity, but despite this, some lenders seem to think that is not explicit enough. ”
Another banker called for a “common sense interpretation” of the guidelines. Some banks have already quietly started giving coronavirus loans to affected businesses, but others fear acting without more explicit guidance from regulators.
Private equity groups have said the government should act quickly as many companies they own were offered temporary extensions to their funding at the start of the pandemic, but those deals are now expiring.
“It’s a natural time to say, it would be nice to be clear on [the state-backed loans] and we wouldn’t have these difficult conversations with the banks, ”said a private equity lobbyist. Rescue loans “are more attractive and less expensive” than other types of loans and “give more convenience to banks,” the person added.
After failing to obtain state-guaranteed loans, many private equity firms have in recent months exploited the bond markets, turned to private credit providers, and in some cases used their own. funds to support the businesses they own.
Separately, bank executives are also in talks to provide additional advice on how to restructure government guaranteed debt if a borrower needs more money or an extension.
Demands on the state-backed loan program have slowed in the past two weeks, with £ 3.4bn loaned to 896 companies under the Coronavirus Large Business Interruption Loan Program (CLBILS) and £ 13.4 billion loaned to 121,669 companies under the coronavirus’ smallest business interruption loan. Regime (CBILS).
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