The UK government is drawing up plans to buy equity stakes in airlines and other companies hardest hit by the coronavirus crisis, after warnings that the economic packages it has announced so far will not be enough to save them.
The plans would see the UK taxpayer inject billions of pounds into companies including British Airways in exchange for shares that would eventually be sold back to private investors, according to three people briefed on the proposals.
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Two of the people said the government was contemplating the move after being warned by bankers that the support it has already unveiled — including £330 billion ($675b) of loan guarantees — would not be enough to stave off the collapse of companies that had seen their revenues all but evaporate.
"They are coming up with a Tarp-like programme for certain industries like the airlines," said one of the people, referencing the US troubled asset relief programme that was rolled out during the financial crisis to support American banks.
"There are certain industries where there will need to be an infusion of capital in exchange for equity," they said. "The challenge with a loan is, if you make a loan to a company with no revenues, then accounting will say it's impaired."
They added: "For those companies that are really virtually shut down because of this virus a loan in many ways is not going to work."
The person said that, in addition to airlines, "at some point the government will need to think about all the industries and businesses that might be severely impaired".
"The airlines are obvious, but there will be others," they said.
A second person briefed on the plans said that some companies had entered the coronavirus crisis with too much debt which would restrict how much extra borrowing they could take on.
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They said: "The key is to address the companies that will require some equity capital on top of loans, as the financial structure of each company has limits to accommodate more debt, depending on their sector and existing financial structure."
One of the people warned that the proposal was complex and might not come to fruition.
One UK official confirmed that the talks were taking place and admitted that the state could end up with equity stakes in the airlines. He said the government was being advised by bankers from Rothschild, the investment bank.
However, he cautioned that while the Tarp-type scheme was being discussed the final outcome could turn out to be "more complicated".
Some airlines had been hoping for a more conventional rescue involving state loans and relief on airport charges and air passenger duty but ministers believe this would not necessarily be enough to keep them afloat during a sustained shutdown in the global aviation industry.
Aviation executives made those demands at a meeting with ministers on Wednesday.
Grant Shapps, UK transport secretary, promised this week that the government would not allow the collapse of "world-leading, well-run, profitable" airlines and said an announcement would be made imminently.
Airlines at the meeting included Virgin Atlantic, British Airways, easyJet and Ryanair.
Balpa, the pilots' union, told ministers at a separate meeting last week that it expected airlines to announce the almost complete grounding of their planes next week.
Policymakers in the US have also raised the prospect of taking equity stakes in their domestic airlines.
A stimulus bill unveiled by Senate Republicans this week earmarked $50bn in loans and loan guarantees to airlines. But it also said the government could take stakes in the companies through different kinds of securities in order to participate in the "gains" of its investments.
International Airlines Group, owner of BA, declined to comment.
EeasyJet said: "We fully support and welcome the government's commitment to support airlines during these unprecedented times. Our focus is on measures to help with short-term liquidity and protect jobs, but we can't comment on the finances of other airlines or what action they might require."
- Additional reporting by James Politi in Washington.