UK increases borrowing by $138bn to fund recovery

Bloomberg

Britain ramped up its record bond-issuance plan to help the government finance a recovery from one of the worst
economic downturns in the nation’s history.
An additional 110 billion pounds ($138 billion) of bonds will be sold between September and November, according to the Debt Management Office, bringing total sale plans from the start of the fiscal year to 385 billion pounds. That’s equivalent to about 18% of gross domestic product at the end of 2019.
“It is actually quite significant by historic UK gilt supply standards,” according to John Wraith, head of UK and European rates strategy at UBS Group AG. “But when you add in expectations BOE will do more if necessary, and safe haven demand from risk averse private investors, it is likely to keep yields anchored for the time being at least.”
Gilts edged higher across the curve after the announcement, which was just below 115 billion pounds estimated in a Bloomberg survey of primary dealers. The increase in the DMO’s debt-sale plan is the latest sign of the strain being placed on Britain’s public finances as a result of the virus, with the Office for Budget Responsibility predicting that the budget deficit could swell up to 21% of output this year. Even before the announcement, the nation’s debt-sale plan in the fiscal year through August beat the record set during the global financial crisis.
Still, the Bank of England is helping to keep borrowing costs close to record lows thanks to interest rates at 0.1% and its quantitative-easing program. The BOE will buy just over half of the supply, leaving investors to digest around 14 billion pounds of gilts per month, said Wraith.
The UK will hold 38 gilt auctions between September and November, as well as at least two syndications, and will decide on what maturities to sell after a consultation with investors on July 27. Primary dealers see the government issuing about 450 billion pounds of bonds during the 12 month period, nearly double the record set during the financial crisis.
The yield on 10-year gilts fell two basis points to 0.15%.
Risky debt threatens UK recovery
Seeking to head off a cascade of defaults that promise to set back the economic recovery, Britain’s finance chiefs called for the government to roll over as much as 35 billion pounds ($44 billion) of emergency virus loans.
UK businesses could face 100 billion pounds of unsustainable debt by March, of which 35 billion pounds was backed by emergency lending programs for coronavirus. About 2.3 million businesses will have an emergency loan by then, of which a third are at risk of failure, the report estimates. These businesses employ about 3 million.
The UK’s recovery from the pandemic is already looking fragile, with data showing disappointing economic growth in May. Support programs are scheduled to be phased out in coming months and small company owners face mounting rent bills as they brace for Brexit.
The report recommends that borrowers with up to 250,000 pounds in government-backed loans could have their loans converted to a new tax obligation. Slightly larger loans could be converted into longer-term subordinated debt or preference shares.

The finance group was convened following a March meeting with Bank of England Governor Andrew Bailey, who asked the industry to consider how to handle the emergency loans coming due, Montague said. The group includes Norman Blackwell, chairman of Lloyds Banking Group Plc; John Kingman, chairman of Legal & General Group Plc; and, Omar Ali, managing partner of UK financial services at consultancy EY.
The report recommends that borrowers with up to 250,000 pounds in government-backed loans could have their loans converted to a new tax obligation. Slightly larger loans could be converted into longer-term subordinated debt or preference shares.
“We are going to see this corporation — if things pan out as we expect — receiving equity stakes in thousands, probably tens of thousands of businesses,” Montague said.
While billions of pounds in private sector capital could be tapped to support the recovery, the group said it’s unlikely to be deployed fast enough. Private equity firms, insurers, pensions and other investors could step in after the recovery corporation is set up.