It is understood the government are considering setting up a ‘bad bank’ to potentially rescue ‘nationally significant firms’ in danger of failing because of the coronavirus.
Planning is said to be at an early stage and the bank could be like the asset resolution scheme such as that used to managed the mortgage books of Northern Rock and Bradford & Bingley when they collapsed in the 2008 financial crisis.
Or it could be a sovereign wealth fund, an investment fund backed by Bank Of England reserves.
An offshoot of the Treasury – UK Government Investments – is understood to be talking to senior city bankers about how such a ‘bad bank’ might be structured if it was needed.
Support for large firms has so far been through business loans and commercial paper – unsecured debt securities issued by the government with a lifespan of one year.
But the fear is that the effect of Covid-19 may be so large that it could bring down previously healthy companies, putting them in the position that they cannot afford to repay their debts and having to make mass redundancies.
Companies like Rolls Royce and British Airways have raised billions of pounds to stay afloat, but if the recovery after the pandemic is slow the government could become a ‘lender of last resort’, providing debt that could be converted to equity and keep the companies going.
Bail out cash
Informed sources have said that if bail out cash does become necessary the government is likely to demand preference shares and punitive interest rates which would be administered by the ‘bad bank’.
The source said: “The government will end up with a seat at the table, potentially as an equity owner and there will have to be a very bespoke mechanism.”
The Treasury declined to comment.