British businesses have headed off the threat of a defaults “Armageddon” as the possible end of painfully high interest rates and the energy crisis comes into view, according to the head of the government’s development bank.
(Bloomberg) — British businesses have headed off the threat of a defaults “Armageddon” as the possible end of painfully high interest rates and the energy crisis comes into view, according to the head of the government’s development bank.
Louis Taylor, chief executive officer of the British Business Bank, said the UK is escaping the significant rise in default rates that many feared after last year’s market chaos caused by former Prime Minister Liz Truss’s budget.
The BBB – which administered the Covid-19 loan program — had warned last September that an economic downturn would likely cause a spike in defaults, with many firms loading up on debt during the pandemic.
However, forecasters are expecting a shorter, shallower recession as wholesale energy prices tumble to pre-war levels and calm returns to UK markets. It boosts the prospect of the UK avoiding a wave of defaults that would hurt both businesses and lenders.
“I wouldn’t say the picture is benign at the moment, but I don’t think it’s going to get materially worse necessarily,” said Taylor in an interview. “The prospects are improving because unlike three months ago people can see the peak in interest rates, the peak in inflation and the peak in energy prices. Default rates aren’t massively high in our portfolio.”
Taylor said he’s not seeing a surge in defaults across the BBB’s portfolio and does not expect a significant pick-up despite recession warnings. He said the BBB is “certainly not seeing the Armageddon” that people feared last autumn when the gilts crisis hit.
The Bank of England’s quarterly credit conditions survey suggested that banks expect default rates to pick up in the first three months of 2023, particularly smaller firms. However, lenders did not expect to dramatically rein in the availability of credit to businesses despite the threat of recession.
It came as the BBB’s venture capital arm said it has invested £1.3 billion ($1.6 billion) to help spur growth in young businesses since being launched five years ago.
British Patient Capital said its investments have helped to create an extra 5,000 jobs and that three quarters of the firms said growth would not have achieved or would have taken longer without the funding. BPC – which has pumped money into funds and co-investments – said it now manages assets worth just over £3 billion.
Taylor said there is still a “big need” for the state-backed support in the market and that there is an “increasing recognition” of the need for extended intervention.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.