When the UK's Asset Protection Scheme agreed in principle to insure more than £500 billion (€549 billion; $817 million) in risky assets held by two major UK banks – RBS and Lloyds TSB – there were fears that if certain leveraged loan positions were effectively insured, any restructuring processes involving these loans could be compromised.
As former Apax Partners' head of financial services Stephan Wilcke takes his seat at the head of the UK's Asset Protection Agency (APA) – the organisation running the scheme – these fears are still lurking. But his familiarity with private equity firms and their concerns may at least provide some comfort.
The scheme, which was outlined earlier this year in response to the financial crisis, is designed to promote stability within the financial services sector by giving banks more faith in the value of their assets. Under the plan, the government pays out to the participating institution if a trigger event on a protected asset occurs, such as a payment default or bankruptcy.
Following the scheme's introduction, concerns were raised by some industry participants that lenders sitting on protected assets would, during a restructuring process, not be incentivised to work towards a consensual conclusion. If a process was to result in a hefty write down for the lender, for example, it would theoretically prefer to push the company into bankruptcy instead. Furthermore, fears were expressed that the involvement of a government scheme would add delay to processes often reliant on swift action.
“In a number of different specific client situations, one of the very early questions will be: “which bank is in the chair, and is it in the APS?”,” says Steve Russell, head of private equity portfolio restructuring at PricewaterhouseCoopers, who adds that, as restructuring activity has gathered pace, the potential negative consequences of the scheme have remained in the realm of theory.
Negotiations between prospective participating banks and the APA are ongoing at the time of going to press and it is unclear whether both Lloyds TSB and RBS will participate on as large a scale as initially agreed. The appointment of Wilcke, a man with considerable experience on the financial sponsor side at Apax and the credit asset management side at Cairn Capital, may provide private equity firms with some reassurance that their interests will be taken into account if they do.