British state examines equity stakes in businesses affected by Covid-19 shutdown
British officials are looking at a model of state support used by the Thatcher government 40 years ago to support prominent UK businesses thrown into crisis by the coronavirus lockdown.
As Jaguar Land Rover Group became the latest company to confirm it was in talks with officials over a rescue plan, consideration was being given to a new bailout vehicle that would offer convertible loans or take preferred equity in troubled companies.
The approach was used during the economic downturn of the 1970s and 1980s and led to the wave of privatisation that cemented former prime minister Margaret Thatcher’s reputation as a champion of capitalism.
Troubles at JLG are partly long-term and structural. Despite the successful launch of new electric models, the car maker remains dependent on diesel engine vehicles for the bulk of its sales. The company employs 38,000 staff in Britain and has used state support to furlough 18,000 members of its workforce.
Jim O’Neill, a former Goldman Sachs Asset Management chairman and government minister, told the
Financial Times that £25 billion (Dh111bn) could be set aside for a new body to invest in inherently stable businesses.
“You convert into preferred equity on the assumption that some of these companies have a good future and then flog them – a la Margaret Thatcher,” he said.
Philip Booth, an economist with the Institute of Economic Affairs, said the government would face the loss of all its investment if the business ended up going bust. However equity stakes would give the state much more control over parts of the economy, allowing bureaucrats to direct economic activity.
Other businesses in the industrial base that may need to tap support include the airline engine maker Rolls-Royce, aerospace firms and steel manufacturers Airlines including Virgin Atlantic could be included in the scheme, which has been called Project Birch.
JLG rival Aston Martin has reacted to a collapse in its sales with a management shakeup. Chief executive Andy Palmer, who led the launch of the DBX, a $189,000 (Dh700,000) 4x4, is reportedly set to be replaced by Tobias Moers, the head of Daimler’s Mercedes-AMG performance division. Mr Moers has an industry background in electric vehicles.
Preliminary figures from industry group TheCityUK estimated this month that unsustainable debt among British businesses was up to £105bn before the crisis. It said the need for extra funding would grow through the shutdown. “Faced with falling revenue and additional debt, business will require full-scale recapitalisation to alleviate the hit to employment and to sustain the investment required to put the economy back on its feet,” the group said in a note to the Bank of England.
BoE governor Andrew Bailey has indicated the bank needs to go much further to embrace unorthodox policies to pull out of the Covid-19 slump. This could also include negative interest rates, for which he said he had changed his position
“quite a bit”. Mr O’Neill, who is now chairman of the think tank Chatham House, has called for radical thinking, including the relief of student-incurred debt to refloat the economy after the downturn.
With both the government and the central bank talking up interventionist measures, the pound has come under pressure on foreign exchanges. Sterling was trading down, below $1.22 against the US dollar yesterday.
Businesses that may need to tap support include the airline engine maker Rolls-Royce
Oil started the trading week on a high note, continuing its recovery as US supply maintained its decline.
Brent, the most widely traded crude commodity benchmark, was up 0.43 per cent at $35.28 per barrel, while West Texas Intermediate gained 0.66 per cent to $33.47 per barrel at 6.31pm UAE time yesterday.
WTI crude consolidated its gains “as demand picks up on global business reopening and improved economic activity”, said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
“Though US-China tensions could slow down the pace of the recovery, the improvement in basic energy demand should continue keeping the short-term trend on a positive path and give support to WTI near the $30 per barrel [level].”
US oil prices recovered by about 70 per cent from the beginning of this month, buoyed by a slowdown in drilling activity across US shale basins.
WTI’s gains are a reversal of its performance last month when it plunged below zero to -$40 per barrel towards the expiry of the May contract. The futures took a tumble as sellers scrambled to find storage for their crude.
US oil prices recovered by about 70 per cent from the start of May, buoyed by a slowdown in drilling activity
Supply also retreated further after US drillers stopped production, even as Opec+ oil producers continue to cut back more than 9.7 million barrels per day this month and in June.
America’s rig count, an indicator of upstream activity, slipped to its lowest level since 2009, as shale independents continue to shut in production.
Rig count data by Baker Hughes indicated a fall by 21 to 237 for the week ending last Friday.
US producers are in the process of halting 1.75 million bpd of production by early June due to operating losses, lack of demand and storage capacity limits, IHS Markit said.