Equity lifeline urged to reboot zombie firms
Bank of England mulls ways to spur long-term investment and support those burdened with debt
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