Credit watch for officials over Covid loans as pandemic clouds persist

Officials are on alert to the risk of companies defaulting on state-backed Covid loans during the next stages of the pandemic, according to the head of the state body overseeing part of the portfolio provided under the emergency scheme.

Charles Donald, chief of UK Government Investments, said that it was performing a “monitoring role, for the Treasury, of large exposures” in the government’s loan portfolio until final maturity in March 2022.

This included analysing the “potential pressures that will exert themselves on the anticipated repayment schedule. It’s what I would call credit watch,” he said.

“We’re just watching it very closely,” he added. “Who knows what happens next in terms of the pressures of the next stage of the pandemic on different sectors?”

Donald said the stewardship of the Covid loan portfolio was focused on two of the emergency schemes: the Bank of England’s Covid Corporate Financing Facility and the Coronavirus Large Business Interruption Loan Scheme, which carries state guarantees of up to 80 per cent.

UKGI also helped with the Treasury’s ‘Project Birch’ plan to take stakes in critical companies whose operations had been affected by the pandemic. 

Ultimately only one company benefited: the south Wales-based steelmaker Celsa, which was given a senior debt facility. But Donald said that this did not reflect the number of inquiries from companies seeking government help. In almost all other cases, he said, a private-sector solution had been found.

Donald, a former Credit Suisse banker who became chief executive as the pandemic took hold in March 2020, confirmed the scheme had ended. “There’s an enormous amount of stuff that has been done not necessarily visible. Often you find that there are other solutions.”

The UKGI’s wider role pre-pandemic was managing a £945bn portfolio of wholly and partially owned state enterprises, including NatWest, Channel 4, the Post Office, Land Registry and Urenco, the nuclear fuel supplier.

It provides a level of private sector knowledge, including bringing in outside experts, to advise and implement policy for government departments.

In a wide-ranging interview with the Financial Times, Donald said he expected further sales of shares in NatWest this year given the strength of equity markets and the removal of curbs on dividends.

In May, UKGI sold down £1.1bn in NatWest shares, its second disposal in two months. This reduced the government’s stake to under 55 per cent, 13 years after the bank, known then as Royal Bank of Scotland, was nationalised and brought under state control during the financial crisis.

Asked about further sales of NatWest shares, he said: “I would expect so, but it’s always subject to conditions. After a bit of a lull, we have made a little bit of progress this year. Our obligation is to make sure we are monitoring at all times opportunities to sell on a value-for-money basis.”

He said that it “feels quite a healthy market” and government’s removal of the “guardrails” limiting dividend payments by UK banks was also “very positive” for potential returns.

UKGI is set to finalise selling other assets from the financial crisis era that were once owned by Bradford & Bingley and Northern Rock under the UK Asset Resolution scheme.

The UK government is seen by some in the business community as becoming more interventionist, in part after accumulating debt and equity stakes to support businesses in the pandemic.

This week, the ‘Future Fund: Breakthrough’ was launched to invest up to £375m in UK start-ups, illustrating that the government is keen to broaden the exposure of the state to promising private enterprise. 

“The pandemic clearly created a uniquely challenging situation where support was needed,” said Donald. “There is partly a coincidence of timing around a lot of these things . . . so it’s definitely busier.”

Donald said the UKGI was also setting up a unit to better understand the government’s contingent liabilities — figures from the 2018/19 financial year put the figure at £377.5bn — with the aim of reducing the exposure.

“One would hope and expect that, as a result, those contingent liabilities end up being not necessarily contained, but at least understood better, so that ultimately the taxpayer does not have quite as significant an exposure as [they] might right now.”