In an interview with Global Capital, White & Case partners Debashis Dey and Hyder Jumabhoy comment on consideration by the Bank of England of ways to support businesses left out of COVID-19 support schemes, with a focus on sub-investment grade corporates and encouraging lending into the real economy and potentially a securitization structure via the set-up of an intermediary bank.
"You have a category of stressed businesses which are at their core 'good businesses', with viable business models, and were genuinely performing well, and we have come into a period where they are being shut because of customer health concerns," said Debashis.
Jumabhoy said: ""The big worry is around "zombie businesses", i.e. businesses which are or may become balance-sheet insolvent but not necessarily cashflow insolvent. In this scenario, these businesses may struggle to recover when government relief support comes to an end. There will come a time when bonnets will get lifted and only then will the extent of the concern truly become known."
Legal advisors say it is incorrect to call the proposal a bad bank however, stating that the proposition would not involve the takeover of whole businesses such as the model used by the Spanish central bank during the sovereign debt crisis.
"Because of the structure used for bailouts of UK banks in 2009 and 2010, during the global financial crisis, there is possibly a misnomer about what the BoE is currently considering," said Hyder. "What it's proposing is possibly a shared platform of some sort for stressed and distressed companies, as part of a wider debt restructuring solution. The aviation industry has appointed specialist advisers, for example, but all of the discussion is very preliminary."
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