Back to the future for debt panel proposal

August 10, 2009

MALAYSIAAnything that saves time and money in the restructuring of debt sounds like a good idea — particularly given there are likely to be a lot more bad loans that will need sorting out in the coming months and years. 

London bankers working in this area have begun pushing an idea to by-pass the courts in the restructuring of billions of pounds worth of debts.

Like many of the ideas currently being kicked around on regulation — and sorting out the mess left by the financial crisis – it seems to be a case of back-to-the-future. The idea is apparently for the establishment of a panel with echoes of the informal London Approach operated by the Bank of England before the Financial Services Authority (FSA) took over the regulation of banks.

Reuters restructuring correspondent Tom Freke has got details from his sources who are pushing the restructuring panel as an alternative to British government proposals to make UK insolvency rules more like the U.S. Chapter 11 process.

This explanation of the London Approach comes from the British Bankers’ Association:

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.

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

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.

Andrew Spiers, an MD at London advisory firm Hawkpoint, reckons that an informal resolution mechanism would fit better with the financial culture of the City of London. 

The proposed panel would be modelled on the UK’s Takeover Panel, which oversees mergers and acquisitions in the UK.  

This all sounds well and good. Getting creditors to sort these things out themselves without dragging them through the courts has to be worth a try.

But without some sort of regulatory back-up, it’s unlikely to fly.

So it’s time for the FSA to get its skates on and decide quickly whether or not to give its official backing to the panel plan — at least as the first stage of arbitration, to prevent some of the tortuous wranglings otherwise associated with debt restructurings.

For anyone in doubt, look no further than the battle going on over restructuring the debt of car cleaning firm IMO Car Wash. After three days in court, a judgement is expected on Tuesday.

Photo: Reuters

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