As out-of-court restructurings and mandates picked up speed in 2024, liability management professionals are grappling with the growing number of debtholder co-ops and the potential of parties pursuing “LME 2.0” — a second-stage liability management exercise (LME) with companies that have already had an LME.

Two groups of panelists including bankers, financial advisors, asset managers and attorneys covered the rise of LMEs and decline in Chapter 11 filings at Debtwire’s Restructuring Forum in Miami this week.

Lender co-ops are very different today than they were years ago, Steve Zelin of PJT Partners said. One of the first real large co-ops was in iHeart Media’s case, where a co-op was launched as a defensive mechanism before the company filed for Chapter 11, he said. Today, co-ops are being formed with “warriors of the industry,” well before there’s an expectation of a transaction, Zelin said. Co-ops are now including multiple classes of creditors and include provisions on who can participate, he said.

Jon Henes of C-Street Advisory Group said he’s been seeing the trend of liability management take over, with lenders coming together in situations that aren’t “dire,” giving companies a discount and a longer runway. There’s been a big shift from “messy Chapter 11 cases and big recaps” to liability management and 363 sales in bankruptcy, Henes said. The liability management world is much more consensual, and reports of creditor-on-creditor violence can impact negotiations, Henes said.

One of the positives of a co-op is that there will be 80% to 90% of the market in the room when negotiating, which provides a greater level of certainty, but Zelin said bankers and lawyers take “a lot of heat” when co-ops form with only 55% to 60% of the market. Certain creditors predetermine that they want to do a deal and keep others out, he said. A co-op may prevent a company from having flexibility, and the issuer’s original objectives may have to shift given the changing dynamics of the marketplace, he said.

Co-ops have levels of consent that are higher than the threshold required in Chapter 11, according to William Derough of Moelis & Company. In a bankruptcy, Derough said he could go to a group of unsecured creditors or second liens and get two-thirds in dollar amount and 51% of creditors in a class to accept a plan for confirmation, but that it’s not possible with cross-group co-ops that encompass multiple tranches of debt. Co-ops could lead to more bankruptcies because companies can’t get to a deal, he said.

“You’ve got dogs and cats and snakes living together, having birthday parties and stuff like that, and not letting anybody in,” Derough said.

One of the issues surrounding co-ops is 80% participation in a co-op that refuses to do a deal could make filing for bankruptcy difficult, Brian Lohan of Clifford Chance said. Getting consent from the secured lender group would be tough, and that could be a con, he said. Moshin Meghji of M3 Partners questioned how sponsors assess their liability management and whether to pursue liability management going forward.

Looking forward to 2025, Henes said he anticipates seeing evolving co-ops, and a company needing flexibility may need to bring in bankruptcy lawyers to put pressure on a co-op. Companies are going to have to get more creative as co-ops get more sophisticated, he said.

At a later panel focused exclusively on LMEs, panelists addressed the potential of LME 2.0.
People question how an LME 2.0 can happen when they have smart lawyers and bankers, and when they secured a deal where any new transaction would have to go through them, Jason New of Lazard said. Looking at documents, New said that parties have not done a good enough job locking down credit agreements, and companies need flexibility to run their businesses.

“It’s like you could drive a truck through some of these things, even though people think the docs are locked down,” New said.

Moderator Leonard Klingbaum of Ropes & Gray noted Trinseo’s recent entry into a transaction support agreement (TSA) to extend its debt maturities and increase liquidity. Under the TSA, the USD 115m in 2025 senior notes will be redeemed and refinanced via the issuance of an incremental USD 115m of term loans due 2028 on substantially similar terms. The company will also enter into a USD 300m revolving credit facility with a reset springing covenant and a maturity date of February 2028, and it will exchange at least USD 330m of 2029 senior notes for new 2029 second lien senior secured notes at a discount to par.

Old school LME transactions include selling core assets and sale leasebacks, Benjamin Rhode of Ropes & Gray said. Noah Charney of King Street Capital Management argued that there have been an amalgam of factors that have dramatically expanded the marketplace for LMEs over the last few years, and LMEs have become synonymous with restructuring. Combining a “huge number” of leveraged buyouts under 5% cost of debt, which later became a 10% cost of debt, and “permissible documents” led to a fertile environment to do what one can to protect one’s interest, he said. If a lender knows what they’re doing, they can save a ton of fees for stakeholders, and it’s a positive evolution in the market, he added.

New pointed to J. Crew Group Inc as a turning point for LMEs, as it was not “shuffling the deck chairs junior to the first lien debt.” There was the ability in the first lien credit agreement to take all of J. Crew’s intellectual property out of the credit group, move it into an unrestricted subsidiary and loan money or exchange money into that subsidiary, essentially putting lenders in front of the first lien debt for what was effectively the entire value of the company, New said. While the transaction was subject to litigation that was eventually resolved, that deal was eye opening to show how a first lien creditor group can lose its collateral, he said.

There is also nervousness about being in the out group, Rhode said, but some lenders are losing opportunities for increased economics by jumping into a situation too soon. However, New contended that original SteerCo members will likely have the best economics going forward.

Damon Yousefy of Alvarez & Marsal noted that parties should consider the tax implications of LMEs when pursuing a transaction. A company with a lot of net operating losses, interest carry-forwards and tax credits could help mitigate tax harm, and speaking with tax professionals early can help shape the deal and ensure that parties aren’t facing massive tax bills, he said. It’s not stopping a transaction, but rather it is finding a structure that reduces risk, he added.