Definition
The London Approach is a cooperative protocol used by banks in London when dealing with customers (typically corporate clients) facing severe financial difficulties or cash-flow crises. Developed to avoid insolvency and preserve value, the London Approach rests on three primary principles:
- Extended Support: Banks undertake to remain supportive as long as realistically possible, offering the customer an extended lifeline.
- Collective Decisions: Participating lenders make decisions collectively to leverage combined expertise and resources, ensuring all stakeholders are on the same page.
- Equitable Sharing: All pertinent information is shared among the lenders equitably, and any new funds injected are distributed fairly among the creditors.
Examples
Example 1: Company ABC in a Cash-Flow Crisis
Company ABC is experiencing severe cash-flow problems due to market downturns. Several banks, including Bank X, Bank Y, and Bank Z, are involved in lending to ABC. Instead of immediately calling in their loans and potentially forcing the company into bankruptcy, the banks opt to apply the London Approach. They collectively agree on a restructuring plan, extend support for a predefined period, and share all relevant financial information among themselves.
Example 2: Global Retailer Facing Financial Hardship
A large global retailer headquartered in London faces financial difficulties due to abrupt changes in consumer behavior. In response, its banking syndicate, consisting of multiple international banks, agrees to use the London Approach. This method allows them to collectively come up with a solution to stabilize the retailer’s finances while ensuring fair sharing of any new capitals injected during the process.
Frequently Asked Questions (FAQs)
What is the primary goal of the London Approach?
The primary goal is to avoid insolvency by providing a cooperative framework for banks to support and stabilize a customer’s business during financial distress.
Who typically uses the London Approach?
It is mainly used by banks and financial institutions dealing with corporate clients who are facing cash-flow crises but have a viable business if given appropriate support.
How long do banks support a distressed company under the London Approach?
The duration of support varies on a case-by-case basis, depending on the company’s needs and the banks’ assessment of the client’s likelihood of recovery.
Does the London Approach apply only to London-based banks?
No, while it originated in London and carries its name, the approach can be adopted by banks and financial institutions worldwide.
Is the London Approach a legally binding framework?
No, the London Approach is more of a guideline or best practice rather than a binding legal framework.
How does the London Approach differ from other restructuring frameworks?
The key differences are its emphasis on collective decision-making, equitable information sharing, and extended support terms compared to more adversarial or unilateral approaches.
Can the London Approach be applied to individual customers?
Typically, the approach is designed for corporate clients rather than individual customers due to the complexity and scale of corporate financial restructuring.
Related Terms
Cash-Flow Crisis
A situation where a company has insufficient liquidity to meet short-term obligations.
Financial Restructuring
Reorganizing the financial structure of a company, often involving renegotiating terms with creditors.
Insolvency
A state where a company cannot meet its debt obligations as they come due.
Creditor
An entity or institution that lends money or extends credit to another party.
Debt Consolidation
The process of combining multiple debts into a single debt, typically with more favorable terms.
Online References to Online Resources
- The London Approach Definition on Investopedia.
- Financial Restructuring on Corporate Finance Institute.
- Dealing with Cash-Flow Problems on Entrepreneur.
Suggested Books for Further Studies
- Corporate Financial Distress, Restructuring, and Bankruptcy: Analyze Leveraged Finance, Distressed Debt, and Bankruptcy by Edward I. Altman and Edith Hotchkiss.
- Financial Crisis, Contagion, and Containment: From Asia to Argentina by George G. Kaufman.
- Corporate and Investment Banking: Foundational Principles and Core Concepts by Larry H. Cox and Seth A. Pearlman.
Accounting Basics: “London Approach” Fundamentals Quiz
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