London Approach1
16/02/2004

The London Approach can be summarised as a non statutory and informal framework introduced with the support of the Bank of England for dealing with temporary support operations mounted by banks and other lenders to a company or group in financial difficulties, pending a possible restructuring.

Introduction

• The London Approach can be summarised as a non statutory and informal framework introduced with the support of the Bank of England for dealing with temporary support operations mounted by banks and other lenders to a company or group in financial difficulties, pending a possible restructuring.
• In order to provide continuity of understanding and help new institutions unfamiliar with the procedures, this paper has been produced by the British Bankers Association to put in writing the basic principles of the London Approach. It is not intended to cover guidelines on practical issues which have evolved but are not mandatory nor exclusive.
• This paper is purely descriptive and does not, therefore, establish any legally or contractually binding requirements or obligations or set any precedents.

Background

The origins of major corporate work-outs lie with the recession of the mid 1970s which saw the advent of multi-bank, multi-jurisdictional problems which considerably increased the level of complexity involved in achieving a corporate rescue outside formal insolvency and led to the development of certain principles of cooperation, understanding and support amongst the banks for dealing with such cases which are now known as the London Approach.

The 1980s saw the level of complexity surrounding the financial and legal position of many groups increase still further. Companies expanded rapidly through acquisitions, both at home and overseas, with associated financing being drawn from an active syndicated loan market, or the capital markets to which the ever growing number of UK corporates were fast gaining access.

As a result, when a company encountered difficulties, it was commonly found that:

• both the lenders and the company lacked sound financial information upon which to base strategic decisions;
• the real level of debt and associated terms and conditions had been substantially underestimated by lenders; and
• there were a large number of lenders with exposures to different parts of a group and/or with different security positions.

As the recession of the late 1980s gathered pace and problem situations started to become more common again, the Bank of England became concerned that these obstacles might prevent potentially viable companies from being rescued. It was also becoming apparent that the Insolvency Act of 1986 was failing to deliver the range of solutions in the UK required to preserve value for stakeholders in complex groups and with cross-border exposures.

Following a consultative process, the Bank of England circulated a letter to banking associations in London in August 1990 with the aim of ensuring that every bank in London should be familiar with the multibank approach to supporting companies in difficulty. It is this informal framework that has become known as the London Approach and which has continued to develop and evolve in the light of experiences with new cases.

Its value has been demonstrated by the successes and the continued positive acceptance in the market.

Originally conceived for banks, it now more broadly covers other lenders/financial institutions providing financial support with the mutual interest of seeing the survival of a company.

Objectives

The London Approach is designed to provide the necessary conditions for financial institutions to assess properly the longer term future of a company: as such, it is primarily concerned with actions in the period between the announcement of a problem and the restructuring of the facilities over a longer term.

Essentially therefore it provides a framework of terms upon which lenders will continue to extend support and, where necessary, provide additional short term liquidity during this period pending a decision on the way forward. Also, it seeks to ensure that decisions about a company's future are based on as good a body of objective information as can be assembled.

The ultimate objective is to avoid corporate collapses as a result of inter-creditor disputes or ill-informed decisions, when collective support by lenders during the initial period of uncertainty is generally thought likely to yield a higher rate of recovery than would be achieved by receivership, administration or related insolvency in other jurisdictions. The London Approach does not aim to preserve businesses unless there is a commercial case for them.

In complex group situations with overseas subsidiaries, the approach encourages the adoption of similar principles of support by local lenders to facilitate an internationally-based solution outside formal insolvency procedures.

Whilst a number of restructurings are high profile and attract public attention, there are some situations where disclosure of a company's financial difficulties could erode confidence and irretrievably damage value and the prospects of survival. The London Approach enables such work-outs to be executed without publicity and its associated drawbacks.

Main Features

The broad principles and features are as follows:

1. The London Approach is a non-statutory voluntary arrangement for financial institutions to respond to news that a group faces financial difficulty.

2. All financial institutions are encouraged to work together towards a common objective of rescuing companies in difficulties.

3. It is not a set of rules and its strength lies in its flexibility at the detail level and the promotion of commerciality and fairness in arriving at equitable and fair treatment for all classes of lenders.

4. The Bank of England's role has been to advocate a spirit of constructive international cooperation and, when asked, to act as an independent mediator concerning any fundamental inter-lender disagreement. There is no formal arbitration process. It encourages all lenders to adopt a reasonable and supportive attitude towards companies experiencing financial difficulty to which they have been willing lenders in the first place.

5. The basic concept is a moratorium or 'standstill' outside a statutory process whereby lenders agree (for a period) not to take any individual action nor to improve their positions relative to each other in terms of repayment or by way of security. This allows time to gather information, assess viability and evaluate options, with a view to implementing an agreed strategy and, if appropriate, restructuring. Loss-sharing arrangements will be included in the standstill documentation

6. Financial institutions remain supportive on learning of customer's problems which critically gives time to enable well-founded decisions to be reached on a company's longer term future, but subject to satisfaction that there is a reasonable chance of a better solution than insolvency and which prima facie does not carry excessive risk of deterioration during the standstill.

7. A detailed independent accountants' review is frequently commissioned inter alia to establish viability and options going forward and appropriate monitoring arrangements put in place.

8. Decisions are then made in the light of an appropriate information base.

9. Any requirement for additional liquidity can be met in a number of different ways:-

• jointly by the group's lenders pro rata to their standstill exposure;
• priority/security arrangements for specific lenders;
• release of asset disposal proceeds subject to entity priority/ring fence considerations.

10. A lead bank (Coordinator) is formally appointed by the group of lenders and endorsed by the company although in practice the coordinator already will have been in discussion with the company leading up to a standstill. Subsequently depending on the size of the lending group, a representative facilitating committee may be elected.

The coordinator will organise inter-creditor issues and lead negotiations with the company towards a refinancing/restructuring and distribute information to all lenders in a timely manner on the same basis. All involved need to guard against breaching insider trader rules or risking creating a disorderly market for a quoted borrower.

11. It is a cardinal principle that:

a. each lender is entitled to exercise its own commercial judgement, but,

b. each lender is expected to be realistic and pragmatic and recognise the impact of its decision on others. No lender should try to obtain terms for itself that are inequitable to other lenders but be sympathetic to the overall objectives of supporting the company.

A number of established practices and procedures have been adopted over many years of multibank work-outs and these practices will continue to evolve in response to changing market conditions, financing structures and instruments. There are no firm rules but further information on areas of detail can be sought from the BBA if required.