An industry taskforce comprising over 160 senior practitioners from across UK-based financial and related professional services has published its early-stage thinking on how the private sector can support UK SMEs to manage unsustainable debt built up during the Covid-19 pandemic.
The interim update  from TheCityUK Recapitalisation Group (RCG), chaired by TheCityUK Leadership Council Chairman Sir Adrian Montague and supported by EY, sets out the scale of the challenge, considers the sectors most likely to need support, explores how private sector capital could be mobilised and what gaps could remain for the public sector, and discusses the key challenges for any proposed solutions to ensure they work for businesses right across the UK.
At this stage, the RCG has not settled on any specific solutions, but it has set out potential options, alongside the critical policy and regulatory questions which need to be considered to make these viable. Their success will be reliant on identifying the right delivery mechanisms.
This interim update of the group’s work provides an opportunity for wider consultation to ensure that any final recommendations will work for SMEs, investors and policymakers.
Miles Celic, Chief Executive Officer, TheCityUK, said, “It has been inspiring to see the industry come together to devise new ways of supporting businesses across the country in these unprecedented times. We are still some way from making our final recommendations, but our intention is to find solutions that will ultimately leave a legacy that drives economic growth in every part of the UK and long into the future. There is real determination that the industry plays its part, working alongside government, to overcome the economic challenges brought about by this pandemic.”
The RCG projects that by March 2021, UK businesses are likely to face between £97bn to £107bn of unsustainable debt . Of this amount, around half will sit with SMEs, with between £35bn-£40bn of the unsustainable debt burden on small businesses, and between £16bn-£17bn on medium-sized businesses .
By the end of March 2021, while the majority of unsustainable debt will stem from existing debt, the RCG estimates that between £32bn-£36bn of the total unsustainable debt will stem from the Government’s Covid-19 lending schemes; this is broadly a third of total projected lending resulting from the schemes .
The RCG’s analysis suggests that the sectors most exposed to unsustainable debt by March 2021 are likely to be property (representing 24% of the total estimated unsustainable debt), accommodation & food services (16%) and construction (11%) .
On top of the unsustainable debt, some sectors may be less able to weather short-term revenue shocks and will need support sooner than others. The RCG’s analysis suggests accommodation and food services, transport and storage, construction and business admin and support service sectors could be among those.
Miles Celic continued, “SMEs are the engine of the UK economy. Lifting the debt burden from the shoulders of otherwise viable businesses will be essential to supporting a robust and sustainable economic recovery. However, this is a huge and complicated challenge. It is already clear that there won’t be a one-size-fits-all solution. We need a range of viable options, which, between them, can help to support the unique needs of those SMEs, and the many different types of investor who could form part of the solution.”
The interim update shows that the recapitalisation needs of UK SMEs are particularly acute given the low volume of equity historically raised by SMEs (an average of £7.2bn a year between 2017 and` 2019). Equity investment into UK corporates has typically focused on growth capital (versus capital for rescue or turnaround), with the vast majority of equity finance being channelled into London-based firms.
There are a broad range of capital providers who could help to meet the demand for capital, including institutional and overseas investors, although the ability to (re-)allocate capital to UK SMEs for the purposes of recapitalisation varies. Enhancing the role of private equity and unlocking capital from UK insurers and pension funds could be among potential options. This requires further consideration of these investors’ risk and return dynamics and what is possible operationally and within the current regulatory framework.
A wide range of ideas for recapitalisation instruments have been considered. The current focus is centred on preferred equity, tax-based solutions, and forbearance. The RCG is now seeking feedback from businesses and a broad range of stakeholders on these potential options to help inform the next stage of the work.
Omar Ali, UK Managing Partner for EY Financial Services & Chair of the RCG Working Group, concludes, “None of the options we outline neatly solve all of the problems faced by many businesses as a consequence of the pandemic, and that’s to be expected – if this were easy, there wouldn’t have been a need to set up the Recapitalisation Group. We do however believe that if these options are developed appropriately, some could have a real and positive economic impact on individual businesses, protect jobs and help to restart the UK economy. There are still many questions to be answered before we reach firm conclusions, and we look forward to receiving feedback as we work towards our final recommendations.”
Following publication of the interim update, TheCityUK’s RCG will continue to consult widely to help develop the most viable solutions and delivery mechanisms. It plans to publish its final recommendations in July.
Notes to editors
 TheCityUK, Recapitalisation Group Interim Update, 8 June 2020
 Our analysis of unsustainable debt estimates the amount of lending which businesses may struggle to meet the financing costs of, by March 2021. As part of a preliminary phase of work, the RCG previously disclosed estimated unsustainable lending volumes of £90-105bn. Since then, estimates have been refined to take into account various Government initiatives seeking to off-set the financial shock experienced by UK companies, updated economic data, and expanded to cover all government business lending schemes in operation at time of writing (28/05).
 Using BEIS data, small businesses refers to businesses of 1-49 employees, and medium businesses refers to businesses of 50-249 employees.
 There are limitations to this analysis which should be noted, and the numbers should be treated with caution. In the absence of any official and consistent current data, the RCG analysis is based on a number of key suppositions and assumptions, including but not limited to, the length of the pandemic, the timing and measures taken to relax lockdown, and the top-down interrogation of high-level data prepared in other contexts. The RCG will review and refine the analysis as more data becomes available.
 This analysis is based on the relationship between the pre-crisis indebtedness of these sectors, and the likely hit to their revenue from the pandemic, and the categories align with the ONS.