A sharp fall in economic activity means many UK companies’ cash flows are under pressure. To maintain employment, buildings and equipment through the Covid-19 shock, we estimate that companies could face a total cash-flow deficit of £140 billion.
Large declines in spending, as a result of the Covid-19 pandemic and the public health measures to contain its spread, have led to a material reduction in turnover for many UK companies. We have estimated how companies’ cash flows could evolve.
Our analysis uses accounting data covering 85,000 individual companies to estimate the aggregate ‘cash-flow deficit’ that could result from the Covid-19 shock. This is a mechanical estimate of how much financing UK companies could require to maintain employment, buildings and equipment.
We assume that companies keep paying workers and invest enough to stop property and buildings from depreciating. We also assume that companies continue to pay their interest, tax and trade bills.
We estimate that companies could face an aggregate cash-flow deficit of around £140 billion from Q2 2020 to Q1 2021 (Chart A). The Government has put in place a number of fiscal measures in response to the shock, including the Coronavirus Job Retention Scheme (CJRS), which helps to pay the incomes of furloughed workers. In the absence of the fiscal support schemes, we estimate that the aggregate cash-flow deficit of UK companies would be larger, at £190 billion.
Chart showing an estimate of the cumulative UK corporate cash-flow deficit from Q2 2020 to Q1 2021
Companies need to finance their cash-flow deficits to avoid having to take actions that would reduce the productive capacity of the economy and increase the risk of longer-term economic damage. At one extreme, if companies with a deficit used all cash balances available before the shock they could reduce the aggregate deficit by around £85 billion.
But many companies will seek to take on additional debt to meet some of their cash-flow deficit and evidence suggests demand for credit has already risen. The Financial Policy Committee assumes banks will meet some of this credit demand, and expects major UK banks to expand net lending to UK companies by around £55 billion in 2020. Most of this lending is assumed to take place through the Government’s lending guarantee schemes.
Debt will not be the appropriate form of finance for all companies. Some companies will raise new equity or sell assets to meet their deficits. Some companies may be unable to finance their deficits and will go bankrupt.
This post has been prepared with the help of Danny Walker.
This analysis was presented to the Monetary Policy Committee and Financial Policy Committee as part of their May 2020 round. It also featured in the May 2020 interim Financial Stability Report and a separate technical annex.
Share your thoughts with us at BankOverground@bankofengland.co.uk.