As CBILS defaults rise, what now for struggling borrowers?
January 18, 2023
The Coronavirus Business Interruption Loan Scheme (CBILS Scheme)
One of the three main pandemic loan mechanisms, the CBIL Scheme, ran from March 2020 to March 2021. Lenders advanced a total of £26.4bn to 109,877 borrowers at an average loan value of £240,000. The maximum loan was £5m and the government provided a guarantee of 80% of the debt. The lender could take security against the assets of the borrower and for loans above £250,000 it could also take personal guarantees, but in neither case could a principal private residence be used as part of the security.
CBILS defaults
There continues to be a severe lack of timely information in the public domain about the performance of CBILS. The latest data available on the website of the Scheme’s overall manager, the British Business Bank, only runs up to the end of September 2021. Information from the government is restricted to the end of March 2022. Some partial data has since been extracted under a number of Freedom of Information requests.
However patchy the figures may be, there is no doubt that defaults are escalating. In September 2021 CBILS defaults were ‘fewer than 0.5%’. By March 2022 they were ‘fewer than 1%’. By mid-June 2022 an FOI disclosure revealed that defaults were above 2%. Another FOI reply said that by October 2022, 4% of CBILS lent to the construction sector were in default. Construction defaults had been only 2.5% in June.
As the recession bites and borrowers see their revenues reduced by the impact of the cost of living crisis and as increased labour and other input costs cut their profit margins, there will be more and more CBILS defaults.
What will lenders do about CBILS defaults?
Unlike with the smaller Bounce Back Loans (BBLs), lenders have security for their CBILS lending but of course they also have skin in the game because the government guarantee only covers 80% of the advance, as compared to BBLs where they have full protection, at least in theory.
There is no sign from the insolvency statistics published by the Insolvency Service that CBILS defaults are translating into mass business failures. Corporate insolvencies are rising and will have been at the second highest ever annual level in 2022, but they are not off the chart, at least not yet.
But things are stirring in the recoveries departments of Scheme lenders. One of the top BBL lenders has just announced a pilot project involving the recovery of a sample of one hundred BBL defaults. It is only a matter of time before the focus turns also to the increasing CBILS defaults, especially as they must demonstrate that they have made reasonable efforts to recover the defaulting loans before they can trigger their government guarantees.
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What should struggling CBILS borrowers do?
Despite the 80% government guarantee, borrowers remain responsible for 100% of their CBILS debt. Unfortunately, there is no equivalent to the repayment flexibility provided to BBL borrowers through the Pay as you Grow scheme. One of the largest CBILS lenders says on its website: “Where default occurs, we follow our standard commercial recovery procedures (including the realisation of security) before we make a claim against the government’s guarantee for any shortfall.” The message could not be clearer.
Never the less, if the borrower is viable but has cash flow issues, it may be possible to negotiate some flexibility. The first requisite will be having a realistic plan to address the underlying problems causing the cash crisis. Putting this together and selling it in to the lender will almost certainly mean bringing on board independent restructuring advisers, who understand the art of the possible with the lender and can bring credibility to the plan by endorsing it.
Independent advisers can also review the overall financial position and help the borrower to decide what the best way forward is and then help to implement the chosen strategy. The sooner expert advice is taken, the better the outcome is likely to be.
What about personal guarantors?
They too are on the hook for all of the debt, or such limited element of it as they have guaranteed. A lender does not have to wait until it sees the outcome from its recovery actions against the borrower before turning to the guarantors. Lenders will call the guarantee immediately, putting the guarantor at risk of having to pay what the borrower cannot. Guarantors should take their own expert advice as a matter of urgency if the borrower defaults.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.