Eq­uity life­line urged to re­boot zom­bie firms

Bank of Eng­land mulls ways to spur long-term in­vest­ment and sup­port those bur­dened with debt

The Daily Telegraph - Business - - Business - By Tom Rees

A LE­GION of heav­ily in­debted “zom­bie” firms could hob­ble the econ­omy for years un­less they are able to se­cure fresh fund­ing by sell­ing stakes to in­vestors, a top Bank of Eng­land of­fi­cial has warned.

The cen­tral bank is mulling a re­vamp of its rules to en­cour­age longterm in­vest­ing in com­pa­nies as firms are left with huge debt piles af­ter Covid-19, Alex Bra­zier, its ex­ec­u­tive direc­tor for fi­nan­cial sta­bil­ity, re­vealed.

Busi­nesses forced to bor­row vast sums dur­ing the Covid cri­sis are likely to hold back on spend­ing and hir­ing as the re­cov­ery gath­ers steam, he said, with po­ten­tially se­ri­ous con­se­quences for fu­ture growth.

He ar­gued that firms should be en­cour­aged to put their fi­nances back on an even keel by sell­ing shares to new in­vestors, rather than tak­ing on debt.

The Bank’s Fi­nan­cial Pol­icy Com­mit­tee (FPC) is in­ves­ti­gat­ing whether ex­ist­ing rules make it harder for busi­nesses to sell eq­uity stakes to would-be back­ers, Mr Bra­zier re­vealed in a speech yes­ter­day. He said the cen- tral bank and min­is­ters must be “am­bi­tious” in re­form­ing the fi­nan­cial sys­tem “to re­move any bi­ases against the pa­tience that’s needed for many eq­uity in­vest­ments”.

Mr Bra­zier, who is a mem­ber of the FPC, said: “Fuel must con­tinue to be in- jected, and the fuel may need some­thing ex­tra to be added. That ad­di­tive is eq­uity.

“More eq­uity will be needed: to help some com­pa­nies through the dis­rup­tion; to build new eco­nomic mus­cle; to grow to re­place that which is lost; and to help oth­ers re­struc­ture once the dis­rup­tion is over and avoid the bur­den of debt hang­ing over in­vest­ment and em­ploy­ment.” Al­most £50bn has been handed out un­der the Trea­sury’s tax­payer-backed lend­ing schemes, while the Bank’s own debt pro­gramme for large firms has pro­vided an ex­tra £19bn.

Of­fi­cials are said to be in­ves­ti­gat­ing ways to help firms that tapped state­backed lend­ing schemes to tackle their debt piles. The bank­ing in­dus­try has pro­posed a stu­dent loan-style sys­tem where re­pay­ments rise as com­pa­nies’ rev­enues go up, while oth­ers have called for loans to be con­verted into grants or stakes in firms.

Busi­nesses will be forced to grapple with £275bn of ma­tur­ing debt next year, Mr Bra­zier said.

A fail­ure to step in will trig­ger busi­ness col­lapses and job losses. He said cen­tral banks must in­ves­ti­gate whether mea­sures are needed to stop firms gorg­ing on debt in good times, putting the “wider econ­omy at greater risk of harm in the bad”.

Mr Bra­zier added that reg­u­la­tors must also ex­am­ine why in­vest­ment com­pa­nies which make bets that last for decades are re­luc­tant to sink their funds into long-term, hard-to-sell and un­listed as­sets.

Just 3pc of in­vest­ments made by in­sur­ers and pen­sion funds are in com­pa­nies not listed on a stock ex­change.

Some 85pc of the £1.4 tril­lion of in­vest­ments in the UK are held in ope­nended funds that al­low in­vestors to quickly turn their hold­ings into cash. Th­ese are less likely to sink funds into un­listed eq­uity and illiq­uid as­sets.

Mr Bra­zier said: “If we can re­move the cur­rent bias against the growth of closed-ended and long-term as­set funds, new op­por­tu­ni­ties for is­suers and in­vestors can be cre­ated.”

Alex Bra­zier, the ex­ec­u­tive direc­tor for fi­nan­cial sta­bil­ity at the BoE, has pro­posed re­forms to long-term in­vest­ing

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