Treasury and Exchequer
Ministerial Decision Report
Business disruption Loan guarantee scheme – December 2020 EXTENSION
- Purpose of Report
The Business Disruption Loan Guarantee Scheme provides banks with government backed guarantees to ensure that they can lend to businesses which they consider to be viable, but cannot lend to in accordance with their usual commercial terms. This in turn creates new lending capacity in the Jersey economy, ensuring that credit is available to businesses which could not otherwise have obtained bank lending.
This report outlines the current status of the scheme, and proposes the extension of the Business Disruption Loan Guarantee Scheme until 31 March 2021.
- Background
Legal position:
P.28/2020 Draft Public Finances (Amendment of Law) (Jersey) Regulations 202-, approved by the States Assembly on 24th March 2020, agreed a number of temporary modifications to the Public Finances (Jersey) Law 2019. The added modifications included an increase to the limit on guarantees and indemnities that the Minister may provide in a financial year from £3 million to £100 million and the limit on the total outstanding guarantees from £20 million to £100 million.
The amendment to P.28/2020, brought by the Corporate Services Scrutiny Panel and adopted by the Assembly, clarified that:
• the amended powers expire on 30th September 2020; and
• where the Minister has obtained financing, lent money or provided guarantees or indemnities under Articles 26 to 28 while Article 24(8) applied, the financing, lending or provision of guarantees or indemnities remain valid and are not included in any monetary limits set out in Articles 26 to 28 as those Articles apply after the expiry of the modifications.
This in effect increased the limit on guarantees and indemnities that the Minister may provide in a financial year from £3 million to £100 million, and the limit on the total outstanding guarantees from £20 million to £100 million.
The Minister brought these amended powers into effect through MD-TR-2020-0029 by deciding that she considered there exists an immediate threat to the health or safety of any of the inhabitants of Jersey and to the stability of the economy in Jersey.
MD-TR-2020-0030 established the Business Disruption Loan Guarantee Scheme and delegated management to the Treasurer. As part of this, the Minister approved “associated guarantees to Jersey banks of up to £40 million”.[1]
Following this decision, Government allocated blocks of the guarantee to each bank, defined in the contract as the “Guarantee Portfolio Cap”. For four banks this was £5m, representing £4m of guarantees, and for one bank £0 was allocated, it being agreed that loans would be agreed bilaterally.
MD-TR-2020-0113 extended the scheme until 31 December 2020.
Accordingly, the contract expires at 31 December 2020. In the absence of any further decision, the scheme will expire at that date.
Performance of the scheme:
When the scheme was introduced there was concern that bank credit risk appetites could contract sharply, as happened during the 2008 financial crisis. This could have resulted in businesses struggling to borrow when credit was most needed to bridge a period of reduced income due to being unable, or severely restricted in their ability, to operate due to public health measures. Whilst this risk has crystallised to a limited degree, bank credit has remained robust, and the appetite for borrowing has been more limited than the maximum exposure cap under the scheme had provided for.
When established it was also unclear how much demand there would be for the scheme given the unprecedented economic shock and impact of public health measures associated with Covid 19. Banks are only able to use the scheme when they cannot lend on usual commercial terms, so the usage of the scheme is dependent on banks’ credit risk appetites, and demand for borrowing.
At the end of November 2020 around 60 loans had been approved totalling £3,281,700. This reflected a small increase from 55 loans approved at 30 August 2020. Whilst much lower than the £50m initially approved, there has been limited feedback from the businesses and banking community that the scheme has deficiencies. As the availability of bank credit to businesses has not materially contracted, the scheme has acted as an extension to this, allowing viable local businesses to obtain funding even when they do not fit in to the particular credit risk appetite of local banks. This outcome is in line with the scheme’s objectives.
Fewer than 20 businesses have been rejected under the scheme, the vast majority having applied in the first month of the scheme. This is in line with expectations, and it accords that those who sought to borrow immediately as the crisis hit were less likely to be considered as viable in the long term (and so not eligible for the scheme) given the implied lack of reserves and shareholder support that immediate borrowing suggests. 
In addition, even since the expansion of the scheme in May 2020, the vast majority of applicants and approved loans have been within sectors of the economy which were originally included, having been modelled as those sectors most likely to be affected by Covid 19 disruption.
Whilst an audit of bank’s compliance with the scheme has not been initiated given the relatively low level of Government exposure, feedback received has been positive, and implies that banks are complying with the spirit of the scheme. This is based on feedback from the business community and government monitoring of the scheme through discussions with banks and statistical lending and exposure reports submitted by banks. Whilst the maximum interest rate of a loan under the scheme is 450 basis points above the UK base rate, which for the life of the scheme has been 0.1%, the mean interest rate applied remains less than 4%. The primary negative feedback from the business community has been that the scheme is not notably different to bank’s normal lending processes, but this is a proactive decision and contractual obligation on banks, ensuring that banks’ credit expertise is utilised and taxpayer money is only directed to viable businesses.
Given the low levels of new lending under the Scheme and the Scheme being largely flat in terms of new lending, there is a case for allowing the Scheme to run off. Further, feedback from some banks has been that the hospitality circuit breaker initiated in early December 2020 has not led to a material increase in borrowing requests from affected customers, either in or outside of the Scheme.
However, given the ongoing economic uncertainty and the recent increase in Covid-19 cases, and associated restrictions on businesses at a key revenue earning time of year, there is a risk that ending the Scheme at this stage could withdraw an economic support measure when it is most needed. Should conditions deteriorate, businesses may require access to the additional credit which the Scheme provides.
It is also possible that the limited uptake may be due to the high levels of government grants and bank credit extended to businesses, and the Scheme may become more important as these are withdrawn. Further, the Scheme is the only one that invariably requires businesses to repay support, which is an option businesses should exhaust before seeking taxpayer grants. Accordingly, it could be counterintuitive to withdraw the Scheme whilst grant schemes continue.
The other Crown Dependencies are also planning to extend the Scheme until 31 March 2021.
Economic outlook:
In August 2020 the Fiscal Policy Panel updated their economic assumptions[2], including:
- employment to fall by around 1.6 per cent this year, on an annual average basis; and
- Profits in the non-finance sectors are forecast to see considerable falls this year with firms unable to recover revenues lost during the period of restrictions, but without being able to reduce their costs to the same extent. Profitability is expected to recover slowly as demand remains weak.
The Fiscal Policy Panel October 2020 Annual Report[3] notes that “the outlook for Jersey’s economy is for a continued recovery, but along a path of lower output. A key factor for the economy is the expectation for continued loose monetary policy settings and an ongoing reduction to banking profits as a result.”
Options for extension of the scheme:
Having not seen a substantial contraction in bank credit appetites it is pertinent to assess the continued relevance of the scheme objectives. The scheme appears to be functioning smoothly, and there is limited feedback from businesses and banks that the contract, and by extension scheme terms, require material amendment. It is however important that public money is not used simply to allow banks to lend where the rigidity of the bank’s lending policies would not normally allow it.
- Do nothing
It would not be unreasonable to suggest that the scheme has run its life. There is very limited appetite for new borrowing under the scheme, and it has provided credit to those businesses who have borrowed.
This option allows the expiry of the scheme and no renewal. It could assume that the borrowing appetite in the economy is sufficiently catered for by commercial options, i.e. the lending market is performing well. Whilst the limited uptake of the scheme suggests that this has some weight, it must however be considered that:
- The Fiscal Policy Panel forecasts a deterioration in economic conditions, and worsening conditions for business;
- The hospitality sector and visitor economy, which is a primary beneficiary of the scheme, is less profitable during winter months. This may intensify the need for borrowing particularly given the recent hospitality circuit breaker, and exhausting borrowing options being a criteria of the Visitor Accommodation Support Scheme;
- Worsening economic conditions in the UK may lead to a contraction in banks’ credit risk appetites;
- In recent months demand on the scheme has been very limited, and manageable within the States budget; and
- There is a risk of further government imposed restrictions on economic activity due to recent increases in Covid-19 prevalence.
It clear that the economic disruption the scheme intends to mitigate is not over, and that the need for an extension of credit in the economy has not ceased. Accordingly, this option could risk the scheme expiring only to be needed again in the future, which may take substantial time to renegotiate with banks in the absence of the time pressures under which the original contract was negotiated.
- Extend the scheme until 31 March 2021
Noting the uncertainty regarding the necessity of the scheme given the feedback that borrowing appetite in the economy can be met through commercial lending, it may not be appropriate to extend the scheme for a substantial period of time. It may however be considered appropriate to extend for a further 3 months, bringing its expiry in line with other economic support schemes such as the co-Funded Payroll Scheme and Visitor Economy Support Scheme, and take stock of the Scheme at that point in time.
For the reasons outlined in this paper an extension retains the Scheme within the armoury of measures designed to protect against the economic impacts of Covid -19, whilst not immediately putting forward public money. Further an extension would continue to utilise banks’ expertise, controls, risk management and regulation in the allocation of public resources into the economy.
The need for further credit reaching small businesses cannot be discounted given the significant economic disruption forecast. Whilst the Business Disruption Loan Guarantee Scheme contract was negotiated with banks in less than 3 weeks, it is very unlikely that this could be replicated in such a timeframe during less pressurised conditions, even drawing on the recent experience of the scheme.
Further, the limited uptake of the scheme suggests it is unlikely that significant further drawdown would emerge between 31 December 2020 and 31 March 2021. This can be controlled by limiting the Guarantee Portfolio Cap allocated to each bank, as has been done between 1 October and 31 December 2020. More immediately the Scheme continues to meet the objective of extending credit into the Jersey economy and provides credit to viable businesses who otherwise would not be able to borrow.
This option would require an extension of the contract with banks, and a new Guarantee Portfolio Cap, as was done for the previous extension. In the absence of the States Assembly approving further guarantees the Scheme would need to rely on the Minister’s powers to approve up to £3m of guarantees under normal powers. This would constitute £3.75m of new lending, as the scheme only guarantees 80% of the loan (£3m being 80% of £3.75m). This is forecast to be sufficient and can be controlled by the allocation of the Guarantee Portfolio Cap, subject to banks’ agreement. Should demand for the scheme exceed the £3m limit a proposition would be required to extend the Minister’s powers, should the Minister wish to do so.
- Recommendation
Given the limited exposure under the scheme, feedback suggesting that it has worked well, and its continuing ability to ensure that credit can reach businesses who have been adversely impacted by Covid 19 related disruption, it is proposed to extend the Scheme. This relies on the Minister’s ability to issue up to £3m of guarantees, so would reduce the original £50million which was intended to be available under the scheme.
The considerations are outlined in the body of the paper. This approach:
- Ensures that additional credit is available to those businesses which are considered viable but cannot be lent to on bank commercial terms;
- Limits the exposure under the scheme to a further £3m, constituting £3.75m of new lending;
- Allows a further extension of the scheme to consider any prevailing public health restrictions as we enter the winter period;
- Allows further consideration of the prevailing economic conditions, noting the Fiscal Policy Panel’s advice that the economic outlook may deteriorate; and
- Allows further consideration of whether the scheme can be adjusted to assist in Jersey’s economic recovery.
- Reason for Decision
The extension allows the scheme to be used until the end of 2020, allowing businesses to borrow from banks participating in the scheme for an additional 3 months.
Article 28 of the Public Finances (Jersey) Law 2019 provides that:
28 Guarantees and indemnities
(1) The Minister may, in the name of the States, provide guarantees or indemnities.
(2) The total amount of all guarantees and indemnities under paragraph (1) that may be provided during a financial year must not exceed £3 million.
(3) The total outstanding amount of all guarantees and indemnities under paragraph (1) at any given time must not exceed £20 million.
- Resource Implications
The approach does not allocate further funding to the scheme but relies on the Minister’s ability to issue guarantees under the Public Finances (Jersey) Law 2019. Accordingly, the extension of the scheme in this manner restricts the ability of the Minister to issue guarantees for separate purposes.
Government employees have been engaged in monitoring the scheme since its launch at the beginning of April 2020. This will continue regardless of whether the scheme is extended due to the need to monitor existing exposures, so the staffing impact is negligible. Law Officer time is required to draft an amendment to the agreement with banks, which is expected to be limited and manageable within normal business resource.
Report author : Associate Director, Financial Services | Document date : 17 December 2020 |
Quality Assurance / Review : Head of Financial Governance | File name and path: L:\Treasury\Sections\Corporate Finance\Ministerial Decisions\DS, WR and SD\2020-0161 - Business Disruption Loan Guarantee Scheme extension |
MD sponsor : Director of Treasury & Investment Management |
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