Nils Pratley 

Why the UK’s coronavirus bailout plan isn’t working

A dig into the data on the business interruption loan scheme unearths several areas of concern
  
  

A closed tourist souvenir shop on Oxford Street in London.
A closed tourist souvenir shop on Oxford Street, central London. The coronavirus lockdown has battered businesses across Britain. Photograph: Frank Augstein/AP

Do not be misled by the government’s painful attempt to present a doubling in coronavirus loans to small businesses as good news. The numbers are still shockingly low: 6,020 firms have borrowed a grand total of just £1.1bn in three weeks. The doubling in the past week merely represents an improvement from a dribble to a trickle. Rishi Sunak, the chancellor, had promised a flood.

Dig deeper into the statistics around the coronavirus business interruption loan scheme, or CBILS, and there are at least three areas of concern.

First, £1.1bn of lending needs to be seen in the context of the stock of outstanding loans to small and medium-sized businesses before the pandemic. That figure was roughly £155bn, according to the Bank of England’s figures in February. So CBILS has barely moved the dial.

Second, Royal Bank of Scotland says it has approved roughly 3,000 loans and lent £500m under CBILS. So it accounts for almost half the total by value and volume, about twice its “natural” share under normal conditions. Why? Are other banks dragging their feet? Or are the RBS systems just better equipped to handle requests for ultra-low sums such as £5,000, where demand is said to be greatest?

Or, as some suggest, are other banks being entangled in the thicket of “know your customer” rules when lending to first-time borrowers? If so, why wasn’t the problem, a long-standing industry grumble, foreseen by the Treasury? At the very least, the authorities should insist that lending data is reported on a bank-by-bank basis so everyone can see where the blockages lie.

Third, why is there a massive gap between the number of inquiries about CBILS, which is estimated at over 300,000, and the 28,461 actual applications? Duplicate inquires distort the picture, but that’s not a full answer. As the Federation of Small Businesses asks, how many firms are dropping out at the application stage, and why? UK Finance, the bankers’ trade body, does not even offer a figure for rejected applications, another gap in the data. Visibility is terrible.

A quick and popular proposal is to extend the state guarantee over CBILS loans to 100%, rather than 80%. Germany made that switch and has lent €7bn under its equivalent scheme. Pressure is building on the Treasury to follow.

The danger in a free-and-easy 100% approach is the moral hazard. Some unviable businesses would be funded, increasing losses for the state. Fraud might also go up. An 80% system gives banks skin in the game, in the jargon, and so protects the public purse, so one can see why the Treasury took that route.

Yet the risk in the current set-up is that too little money reaches small businesses at their point of maximum stress. They need to be around for the recovery. One tweak, as discussed at the Treasury select committee on Wednesday, would be to put a 100% guarantee only on loans below £25,000. It’s an idea, and the Treasury may have others. But it ought to do something: CBILS isn’t delivering.

Ferguson’s perverse obsession with a full-fat US listing

If the shareholders will not cooperate, change the shareholders. This seems to be the approach at Ferguson, the FTSE 100 builders’ merchants we still remember as Wolseley.

The company’s operations are almost entirely in the US these days and, with the local activist Nelson Peltz making mischief in the wings, the board wants to move the primary stock market listing to New York, supposedly in search of a deeper pool of capital. There’s a problem, though: 75% shareholder approval is required and Ferguson doesn’t think it would get it. UK investors, some constrained by their mandates, rather like owning UK-listed shares.

Ferguson’s solution is either ingenious or devious, depending on your point of view. First, it will seek a secondary listing in the US, which should attract more US funds to the register. Then, within a year, the board will reheat the idea of a full shift to New York and hope the newly-arrived shareholders will shove the majority above 75%.

It’s a plan, and it may work. Yet the Ferguson board’s obsession with a full-fat US listing seems perverse. Just get a secondary listing and assess the “capital pool” thesis over the course of a few years. It’s the obvious compromise solution when shareholder opinion is divided. UK investors, let’s hope, will stand their ground.

 

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