The restructuring market is increasingly gravitating toward a hybrid amend-and-extend framework for out-of-court deals that blends elements of a recapitalization with a consensual prearranged transaction.

“It’s not just extend and see what happens. It’s extend and you know what you’re going to get at the end of the rainbow. And that could be a stock in the box or a hardwired change of control,” said Stephen Silverman, a partner at Gibson Dunn, the most active law firm representing creditors in out of court restructurings.

The approach aims to address what practitioners see as the shortcomings of a wave of liability management exercises, sometimes referred to as money pit structures, that companies pursued in recent years in order to raise capital and extend debt maturities without filing for bankruptcy.

Instead of resolving problems, though, some LMEs have left issuers and lenders with Frankenstein-like, overleveraged capital structures that in many cases fall back into distress, forcing yet another costly restructuring in or out of court.

Lenders are now growing tired of these deals and are pursuing a more strategic approach to restructuring negotiations with borrowers that address future leverage issues without a full restructuring.

“If we’re going to pursue these transactions, we’d rather see the next steps established upfront to avoid a costly repeat process and the added expense burden that comes with it,” said Scott Greenberg, global chair of Gibson Dunn’s business restructuring and reorganization practice and a member of the firm’s executive committee.

“Lenders are looking for more from [sponsors], whether it’s a hardwired change of control or, if you think about some of the deals in the market, subordination of sponsor-owned debt or new money. I think lenders are just pushing harder before they agree to lean in,” said Greenberg.

In one example of a hardwired deal, FXI Holdings last year secured a maturity extension from creditors in exchange for committing to raising junior capital to pay down notes by a 2027 deadline. If FXI doesn’t pay down the notes, creditors will assume almost full ownership, Debtwire previously reported.

In many of these hybrid transactions, creditors and sponsors pre-negotiate an outcome that could include mechanisms such as a “stock-in-the-box” conversion or a hardwired change-of-control transaction. Milestones may also be embedded, requiring a company to pursue asset sales or a broader strategic transaction to meet deleveraging targets.

“We’re seeing the LME tool-kit used to facilitate out of court restructurings, where lenders are taking material equity upside in exchange for agreeing to more significant discount capture on their extended debt. Historically, in certain cases, LMEs have been less ‘sticky’ because the leverage profile didn’t work on the back end. Equity consideration is the natural carrot to fix that in one step,” said Silverman.

“You have a backend transaction pre-agreed to. The result is not a co-op. It’s an exchange agreement where everyone has pre-agreed to exchange their debt for equity of the company,” added Matthew Roose, a partner at Gibson Dunn. “The lenders are signing, the sponsor is signing, and so if there’s a default under the amended credit agreement or a breach of the milestone, there’s an automatic flip into equity and everyone’s pre-agreed to that transaction structure.”

The result is a less contentious framework that offers lenders more control over future outcomes while remaining largely out of court. The emphasis on pre-agreed outcomes also reflects an effort to reduce the cost and complexity of restructurings.

And Gibson Dunn is positioning itself to capitalize on this work, including through the expansion of its restructuring bench in North America and Europe. The firm recently added Roose, a veteran restructuring lawyer at Ropes & Gray with experience across both traditional restructurings and more complex liability management situations.

“Gibson sets the market for these creditor deals,” said Roose.

“A lot of the clients that I had when I was at Ropes are the same clients that Gibson is working with now, and they were all super supportive about me coming over here and encouraging me to come to this platform because they work a lot with the Gibson platform,” Roose added.

Roose’s recent work on convertible restructurings, including mandates involving issuers such as Wolfspeed and Luminar, also aligns with Gibson Dunn’s expansion plans.

While there is some overlap among the asset managers investing in convertible debt, a number of funds focus exclusively on the asset class, Roose said. “That will continue to be an area of focus for us,” he said.