The early stage reaction of the banks to COVID-19 has been largely viewed as positive - initially coming through forbearance in the form of facility extensions, covenant waivers, and repayment holidays, as well as through significant funding advanced under government backed loan schemes. The Bounce Back Loan Scheme in particular has seen over £1bn advanced to support around 33,000 SME’s, though concerns over future repayment and lack of clarity over any necessary recovery process will be something that still needs worked through by banks and government.
The big question now is how the banks will deal with the inevitable distress to come for some businesses, and whether the approach will be similar to that experienced during the last financial crisis. In my view ‘no’, it should be very different, because the circumstances are very different.
The last financial crisis was characterised by a property bubble, highly geared businesses following a period of aggressive lending, and a lack of liquidity in the system. Banks were faced with defaulted debt on a grand scale, an inability of many businesses to cover interest, and in a lot of cases no prospect of debt repayment. Capital pressures on banks were overwhelming, and their approach was largely recovery led by necessity; that is to recover the maximum amount and exit the relationship.
Compare that with the position entering COVID-19 - over a decade of prudent lending to cautious borrowers, a stronger more resilient banking system, and a record low cost of borrowing. Businesses have been knocked out of their working capital cycles and off their repayment paths by COVID-19, but business liquidity will return with trade, and viable businesses should still be able to repay. However, many will need working capital support and loan repayments on different terms to those in place pre-COVID. Debt restructuring should be the favoured approach for those businesses adversely impacted but still viable, or possibly just different, post-COVID.
Negotiating and implementing new debt structures will allow businesses to survive and hopefully thrive, and banks will recognise that where such restructures are possible it will increase likelihood of repayment. The government loan schemes, such as CBILS or the new variant expected in January 2021, will also play an important role as a tool banks can utilise as part of the solutions.
So, as the economy hopefully settles into some predicable state, such that businesses can make reasonable trading projections, 2021 could be a year of debt restructures for those businesses in distress but fundamentally viable. The key as always will be to consider both sides, lender and borrower, and to accept that compromise will be needed to find a middle ground solution that works.