U.K. Banks Weigh Debt Help

By CARRICK MOLLENKAMP and ALISTAIR MACDONALD U.K. banks could pursue a plan that would give faltering companies a way to offload bad debt in order to stave off further bankruptcies and job losses, according to people familiar with the matter. Under a plan that is in its preliminary stages, these people said that U.K. banks -- possibly in partnership with the government -- would set up a fund aimed at preventing corporate defaults. Faltering companies would give the fund equity in exchange for it assuming debt owed to banks, under one structure that is being considered. The proposal is one of a raft of measures being considered by the U.K. government and banks to shore up lending and aid ailing companies as it becomes increasingly clear that a £500 billion ($758 billion) rescue plan, organized in October, is falling short of shoring up a worsening U.K. economy. That plan included a £37 billion capital injection to help U.K. banks boost capital ratios, as well as state guarantees of bank debt. Getty Images The new plan is aimed at helping lenders such as HBOS, which has said corporate borowers are struggling to pay their bills at a surprising rate. But lending surveys and anecdotal evidence show that bank lending has failed to take off. At the same time, corporate defaults are becoming a serious concern. Impairment charges tied to corporate loans, for example, are expected to increase to £13 billion this year from about £8 billion in 2008, according to research firm Sanford Bernstein. Last month, HBOS PLC, which is merging with Lloyds TSB Group PLC, said corporate borrowers are struggling to pay their bills at a surprising rate. The new plan is aimed at helping lenders such as HBOS. One idea is for the big U.K. banks to each contribute £1 billion to £2 billion to a fund that then would invest in companies and allow them to exchange debt for equity, effectively bringing down debt-payment costs. The U.K. government potentially would be a partner in the fund. There are several hurdles. U.K. banks already are cash-strapped themselves and under pressure by the government to maintain high capital ratios, and they are asking the government for flexibility on that point. A separate challenge is identifying which U.K. companies might qualify for the fund. Bank and government spokesmen declined comment or said they weren't familiar with the plan. Several other efforts to prop up lending are on a faster track. One concept is that the U.K. government, for a fee, would guarantee a chunk of a bank loan to a U.K. business. Separately, the government also is considering whether to help spark the ailing securitization business, where consumer loans are bundled into pools and sold as securities. Few investors remain for those securities. One government move might be to also guarantee that those securities would make payments to bond investors. Yet idea is to form a vehicle -- a so-called bad bank -- that would buy hard-to-sell bank assets. Prime Minister Gordon Brown is trying to show he's got solutions. In a speech Monday, Mr. Brown is expected to pledge that he is committed to getting "banks and businesses back on the move." Also on Monday, the government will announce moves to provide financial aid to the increasing ranks of the unemployed, promising £500 million over the next two years to help anybody who has been claiming unemployment benefits for six months or more. The plan will include measures such as incentives of up to £2,500 for employers to recruit unemployed people, and advice for anybody looking to set up a business. —Sara Schaefer Muñoz and Dana Cimilluca contributed to this article. Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com and Alistair MacDonald at alistair.macdonald@wsj.com