One in five UK firms can barely cover debt-interest payments, says report

One in five UK firms is a “zombie,” with profits only just covering debt interest payments, according to a report by an influential Conservative think tank.

Chancellor of the Exchequer Rishi Sunak should relax the rules on repayment of coronavirus debts, Onward said, as it warned the post-pandemic economic recovery will be hampered by “crippling levels of corporate debt.”

Borrowing taken on since the Covid lockdown began in March threatens to push 4.3 per cent of companies, employing 1.8 million people, into technical insolvency, and if dissolved, they wouldn’t have assets to cover their liabilities, according to the study.

UK business have taken out more than £50 billion ($65 billion) of state-backed loans under government programs to help them weather the pandemic. “The government’s loans schemes have been highly effective at helping firms through the worst of the crisis, but they represent a double-edged sword in that they have weighed down firms with debt just as we need them to invest to spur the recovery,” the report’s author, Angus Groom, said in a statement.  Bloomberg

A repayment program could be managed by the Treasury and implemented and controlled by banks, he said.

The warning piles further pressure on Sunak, after a British Chambers of Commerce survey found one in four firms that took on debt through state lending programs say they may have to scale down operations to repay it. Some fear they may have to cease trading altogether. TheCityUK, a lobby group, estimated in July that 35 billion pounds of debt is unsustainable.

Sunak has appeared reluctant to restructure the programs, telling Parliament’s Treasury Committee in July he was “not completely persuaded of the scale of the problem at the moment.” He said U.K. companies had gone into the crisis in a “relatively healthy place” debt-wise, with corporate debt as a percentage of economic output low by both historical standards and in comparison to other developed countries.

The report said the accommodation and food services sector, as well as arts, entertainment and recreation, had suffered the most, and described about 40% of firms in those industries as “zombies.” It said even with the Treasury’s loan and furlough programs, 23% of companies in those sectors will need to take on extra debt to help prevent closing down permanently.