Defaults on CBILS and BBLS loans could be as high as £22 billion if initial estimates from the Office for Budget Responsibility (OBR) are correct.*
£22 billion of defaults would represent c.30% of the c.£74 billion lent under the BBLS and CBILS schemes.
As scheduled payments have commenced on the majority (55%) of CBILS and BBLS loans, following the initial 1-year period where neither interest nor principal payments were required, funding those payments is likely to be a key focus for many UK businesses, particularly where a CBILS loan was taken out with a high interest rate. This focus is likely to be heightened following the recent closure of the Coronavirus Job Retention Scheme (“CJRS”), which was a key pillar of support for businesses during the pandemic (with £68.5bn claimed by employers*). The end of the CJRS will put a strain on the cashflows of many businesses, with many businesses also needing to find additional cash to repay deferred VAT.
One short term option for businesses struggling with their repayments is the Government’s ‘Pay as you Grow’ scheme, which allows companies to take a 6-month payment holiday on their BBLS payments. However, this is not available for CBILS borrowers and using the Pay as you Grow scheme may adversely impact a businesses’ ability to obtain funding in the future, as the scheme only delays repayments.
ACP Altenburg Advisory says that businesses have an alternative option to managing their cashflows to avoid defaults, and this is to consolidate all existing borrowings into a new facility, with the repayment terms reprofiled to meet the forecast cashflow generation of the business.
Similarly, businesses looking for additional funding (for growth etc) may be better off refinancing existing BBLS and CBILS debt into the new debt facilities, since raising additional debt alongside BBLS and CBILS debt can be complex. To raise new funds alongside the original debt will likely require an intercreditor agreement to be negotiated between the BBLS/CBILS funder and the new funder(s), which adds to the complexity and timeline, and also increases legal costs.
Businesses with assets (receivables, inventory, plant and machinery, property etc.) could refinance the CBILS and BBLS debt with an asset-backed debt package. 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 cashflow 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 (e.g. property or a consistently sized debtor book).
Asset-based lending can also help companies looking to grow, such as those who have seen a strong post-Covid recovery, as the levels of funding available expands in line with increased working capital assets, most notably receivables and inventory.
The Government is also offering the Recovery Loan Scheme, which may be available for some businesses. However, this scheme only runs to the end of this year and while they Government is providing a guarantee to lenders, they will not be covering borrower interest payments for the first year, as was the case with CBILS and BBLS borrowing.
Dan Barrett, Partner at ACP Altenburg Advisory says “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.”
Dan Barrett adds “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. As such, it is important for businesses to ensure they have the correct information and the right ask before approaching lenders. Advisers can help businesses understand and articulate their funding need to lenders, and ensure that they speak to the funders that are best suited to their needs.”
ACP Altenburg Advisory is part of ACP, a leading independent debt advisory association for SME and mid-market companies, advising clients on the options available to them and providing hands-on support from day one all the way through to drawdown.
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*Based on the July 2020 Office of Budget Responsibility estimates applied to the final BBLS and CBILS lending figures
**Source: CJRS amounts paid up to 16th August 2021