Restructuring + the "London Approach"
Historically, European banks handled non-investment grade lending and capital structures that were fairly straightforward. Nicknamed the "London Approach" in the UK, restructurings focused on avoiding debt write-offs rather than providing distressed companies with an appropriately sized balance sheet. This approach became impractical in the 1990s with private equity increasing demand for highly leveraged capital structures that created the market in high-yield and mezzanine debt. Increased volume of distressed debt drew in hedge funds and credit derivatives deepened the market—trends outside the control of both the regulator and the leading commercial banks.
The London Approach is not a set of detailed rules, but is a flexible framework which enables banks and other interested parties to reach well-based decisions about whether and on what terms a company in financial difficulty might be allowed to survive.
Its key features are:
● lenders are initially supportive and don’t rush to appoint receivers
● decisions about a company’s future are made on the basis of reliable information which is shared among all the parties to a workout
● such information provides a basis for lenders and other creditors to work together to reach a collective view on whether and how a company should be given financial support ● pain is shared on an equitable basis. These are ‘common sense’ principles which, together with a number of more detailed ‘conventions’—for example super priority being afforded to new money—have developed within the banking community to serve their financial and ‘reputation’ interests. Read more: the Bank of England Quarterly Bulletin, May 1996