Leverage finance investors are recalibrating the liability management exercise playbook as the market embraces tiered exchanges and the threat of third-party capital providers looms large in negotiations with struggling companies.

The shift reflects hard-learned lessons from the past years, when aggressive uptier and non-pro-rata exchanges triggered prolonged litigation and, in some cases, failed to stabilize capital structures.

Tiered exchanges, while controversial to some investors, are increasingly viewed as a way for borrowers and majority groups of creditors to limit legal risk by incentivizing broad creditor participation in out-of-court restructuring plans.

Still, investors warn that not every situation warrants consensus and in cases where creditors face steep losses, large holders will seek to extract as much value as possible.

Sector dislocations

As investors search for opportunities, technology and software companies are drawing early scrutiny thanks to multiple selloffs in late 2025 and late January that heightened concerns that artificial intelligence may disrupt issuers’ legacy business models.

“I think tech is going to be a big focus for everybody, both from an investing opportunity and an asset‑management opportunity,” said Wariz Anifowoshe, managing director and head of restructuring at Fortress Investment Group, adding that there might be opportunities to invest where people are over‑indexing AI’s effect, or thinking the effects of AI are happening too quickly.

The immense promise of AI has attracted a flood of capital to the sector and skepticism from some investors that a bubble is forming. Blue chip and high yield companies alike have tapped public and private debt markets to raise billions of capital to build giant data centers needed to power AI models.

An AlixPartners survey of 400 senior executives in late 2025 found that 61% of the participants said they expect some industry distress in the data center world due in part to rising energy costs, competition and technology disruption.

Ross Rosenfelt, a managing director in Oaktree’s opportunities group, said that while he sees datacenter credits as a “wildcard,” he doesn’t expect restructuring in the space this year.

Instead, Rosenfelt said that he is watching for restructuring activity in the chemicals, packaging, building products, telecom, healthcare and retail/consumer sectors.

“Chemicals is facing both macro and secular pressures caused by overcapacity in China and geopolitical headwinds,” added Michael Chaisanguanthum, managing director and head of restructuring for the credit investments group at UBS Asset Management. “The challenges in building products are the economy, high interest rates (at least, relative to the last 15 years), and constraints around new construction.”

Across all sectors of the market, investors are rethinking underwriting standards following the high-profile bankruptcies of First Brands Group and Tricolor last fall that triggered billions of dollars in losses and criminal charges against senior executives.

“I think whenever there’s a big loss, people try to become better underwriters and ask for more disclosure going forward,” said Jason Mudrick, founder and chief investment officer of Mudrick Capital Management. “People will be more focused on supply chain financing, for example, whether companies are offering rebates to drive revenue, which were some of the issues that impacted First Brands.”

And it’s not only fraudulent situations where underwriting becomes pivotal. Investors are paying closer attention to credit documents to identify loopholes and decide whether it makes sense for them to get involved.

“It’s a competitive market for capital, and as a result, documents remain flexible and borrower‑friendly,” said Fortress’ Anifowoshe. “I don’t foresee things becoming tighter. Some recent [court] rulings have actually clarified things in ways that make documents looser.”

“Underwriting — real, thoughtful credit underwriting — is what’s going to rule the day. Understanding what provisions mean and don’t mean leads to better returns,” Anifowoshe continued.

Active credit markets may offer relief to both borrowers and creditors by helping companies stay ahead of deeper distress.

“Loan spreads are tight given limited new loan issuance and repricing activity is high. We believe these factors should help relieve pressure on stressed companies,” said UBS’s Chaisanguanthum.

Tiers of opportunity 

Still, investors are ready for another year of tough negotiations with borrowers as companies seek to extend maturities and boost liquidity through LME deals that exploit cracks in credit documentation, even as the long-term value of LMEs remains in dispute. 

One of the hottest LME trends in 2025 was the tiered exchanges, gaining popularity after the US Court of Appeals for the Fifth Circuit overturned rulings in the bankruptcy case of Serta Simmons Bedding that blessed the company’s aggressive uptier LME that relied on a non pro rata distressed debt exchange effected through an “open market purchase.”

Tiered exchanges, often non pro rata but still usually open to all creditors, provide big lenders the opportunity to take advantage of their position by securing superior economics, but still pushing smaller creditors to agree to ensure broad participation. These transactions are expected to continue to be popular in 2026.

Saks Global, Tropicana, Oregon Tool, Newfold Digital and Thrive Pet Healthcare were among companies that executed tiered exchange deals in 2025, Debtwire has reported.

“I expect non pro rata deals to continue, but not every situation is right for a non pro rata deal,” said Mudrick. “We were able to do a non pro rata deal efficiently in Tropicana, because they didn’t need a maturity extension. That would have been harder to do if the debt was a 2026 maturity and everybody was extending to 2029, and you could be a holdout and say, I am going to keep my 100 cent claim.”

“Given the cost, distraction, and uncertainty of LME-related litigation, we anticipate that borrowers will continue to try to drive as much consensus as possible,” said Oaktree’s Rosenfelt. “As a result, we do expect to see more tiered exchanges and fewer truly binary outcomes. That said, scale matters now more than ever, and the best way for a firm to protect itself from a weak document and a tiered exchange is to be prescient enough to sell early or build a large enough position to ensure that it is integral to the outcome.”

Various left out creditors in LMEs like Serta, AMC Entertainment and STG Logistics challenged the transactions in court.

“If the situation is performing fine, for example debt trading at 85 and [what the company need] is a simple maturity extension, going through the headache of structuring a non pro rata deal and incurring litigation risks and delays is probably not worth it,” Mudrick said.

“In a more dire situation where everybody’s lost a lot more money, like a First Brands or a Tropicana trading at 40 or 50 cents, I think there’s going to be more of an inclination to extract value from other places.”

Even as LME strategies advance, though, credit investors remain skeptical about the long-term merits of borrowers reworking balance sheets.

“The current LME process of maintaining over-levered balance sheets has not consistently created value for investors,” said Ray Costa, managing director and head of special situations at Benefit Street Partners. Costa said companies should use out-of-court restructurings to deleverage their balance sheets to achieve more “sustainable results for all parties involved.”

Altice France achieved this result last year by reaching a historic cross-border deal with a group of creditors organized under a cooperation agreement to delever and extend maturities in exchange for handing over roughly 45% of equity to debtholders.

Rosenfelt said that he expects to see more out-of-court transactions and quick 363 bankruptcy sales along with foreign court restructuring processes to reduce costs.

Last year, watch group Fossil turned to UK courts to complete a restructuring that allowed it to remain listed and was later recognized by a US bankruptcy court.

Amplified third-party threat  

Hanging over all restructuring talks is the risk that third party capital providers arrive to provide liquidity to stressed borrowers at the expense of existing creditors.

After a period of limited deal-away transaction, the threat materialized in 2025.

Companies including Liberty Puerto Rico and Optimum Communications, previously known as Altice USA, found ways to access new capital through third-party lenders after negotiations with their existing creditors failed to result in deals.

“While third-party deals can present challenges, including around break fees, they are likely to become more common as a way to bring creditors to the table and accelerate negotiations with the existing lender group,” said Benefit Street Partners’ Costa.

Investors say existing creditors must be cognizant of the risk and be willing to offer borrowers terms unavailable to new lenders.

“The threat of a deal away transaction shifts power to the borrower, who can use a third-party proposal to extend runway or gain leverage over its existing creditors,” said Oaktree’s Rosenfelt. “The fact that more distressed borrowers chose to close on third-party proposals last year than in 2024, should leave existing creditors wary of over-playing their hands.”

“It’s almost always going to be better for the issuer to take the new money from the existing lender base if the existing lender base is willing to make some of these concessions that a deal away couldn’t garner,” said Mudrick.

Chaisanguanthum of UBS added that only the existing lenders can deliver significant liquidity, certainty of discount, and maturity extension because they can modify an existing credit agreement. But he said that deal away transactions may make sense when a company has a relatively small liquidity issue it needs to solve quickly.