Via Yahoo Finance

Pumping money into strategically important businesses to prevent them from collapsing comes loaded with risk for the Government.

Rishi Sunak, the Chancellor, has been clear he wants to see businesses “exhaust all options” for other sources of funds before the state steps in.

However, for some large companies, Project Birch may be their only hope, with no other lenders coming forward and their lack of an investment-grade rating blocking them from Bank of England loans.

With no other takers, Project Birch could see the state becoming the “lender of last resort”, initially offering loans on a preferential basis that would see it paid ahead of other creditors.

Longer term, it could see the Government take equity stakes in businesses in the hope of a future payout when they are sold once the business recovers.

Jim O’Neill, an ex-Treasury minister and former Goldman Sachs economist, has suggested an initial £25bn could be sunk into structurally important companies through a public body as preference shares, with debt potentially converting into equity.

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Such a plan comes with warnings. Prof Philip Booth, senior fellow at the Institute of Economic Affairs, said: “By taking an equity stake, the Government has the lowest level of security. It might get back more than it invested, but if the company goes bust it will be paid back nothing.”

He added that equity stakes could also mean poor corporate governance. Prof Booth said: “The British people, represented by a strange mix of bureaucrats and politicians, will own small bits of a huge number of companies and will not have effective mechanisms to ensure that they are run properly.”

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The Adam Smith Institute, another free market think-tank, also has concerns. Matt Lesh, its head of research, said: “The jobs issues make it difficult but this is not about the Government picking winners, it is about bailing out losers.”

If Project Birch does come to fruition, then the top contenders are likely to be airlines and aerospace companies whose fates are intertwined, along with manufacturers of complex products whose long supply chains extend deep into the economy, and primary manufacturers such as steel businesses.

Rolls-Royce could be one of the companies in the frame. Although it said it had £6bn of liquidity in April, it has been burning through this. Cash reserves and plans for 9,000 job cuts may not be enough to weather a storm expected to last at least three years.

Markets Hub – Rolls Royce

The company declined to comment on the possibility of government intervention. However, analysts at JP Morgan believe it is a serious prospect. “Rolls’ role in the UK economy and in the global civil aero supply chain means it cannot be allowed to fail,” said David Perry, an analyst at the investment bank. Virgin is another angling for help. The airline has been calling for a bailout of the sector but so far the cries have gone unanswered.

Although much smaller than rival British Airways, with about 10pc of its opponent’s almost 300-strong fleet, Virgin is still of strategic importance.

Rob Morris, of airline data company Cirium, said: “Virgin offers competition. You find on routes where BA has competition, fares are cheaper.”

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The UK taking a stake in Virgin may come with conditions. This could mean it having to order aircraft with Rolls engines, or only Airbus jets, which have wings made in the UK.

Airbus itself is rumoured to be another contender for some sort of help. Although a Dutch-registered business with powerful French and German state interests, Airbus is seen as a provider of high-tech jobs in the UK, with 13,500 staff here. It is understood the business, which declined to comment, is being considered as a target for British support to protect domestic jobs.

Also understood to be making a joint case for help under Project Birch are Tata Steel and Jaguar Land Rover, both of which are owned by Indian conglomerate Tata. The car maker is thought to want £1bn and the steel business about half that. Between them, they employ almost 50,000 people in the UK, and in pre-crisis conditions, carmakers consumed a third of the steel company’s UK output.

Both companies support many more jobs in their supply chains or customer bases. If they were to go then it would likely cost a far greater number of roles, often in areas focused around such major employers, risking creating regions that were unemployment wastelands.