Creditors looking to survive liability management exercises relatively unscathed increasingly have two options: join the majority ad-hoc group or hope debtholders organize under an inclusive cooperation agreement.

Investors in turn are moving fast to organize at the first whiff of trouble at a borrower or based on the reputation of a financial sponsor, after experiencing too many poor outcomes where they were bypassed altogether or left out of the group that strikes a deal.

“Creditor groups are forming earlier on in the process, and further out to maturity and signing up to these co-ops, which are getting more and more rigorous,” said Natasha Hwangpo, partner at Ropes & Gray. “Because of that, I think that pushes the company to start thinking about LMEs earlier and earlier.”

When creditors are aware of groups forming, the best strategy nowadays is to try to become a part of the group, several sources said.

“It’s really important to get in a group,” a buysider said. “We got hurt a few times when we thought that there was no need for a group at that moment and when something is about to happen, no one lets you in the group.”

In an ideal form, co-ops are designed to align creditors by creating an equal playing field where they negotiate with one voice and strike a deal that treats all creditors in the group equally.

“The co-ops are meant to help lenders lock arms to disincentivize bad behavior that a company might be able to get away with in the capital structure,” said Scott Greenberg, global chair of Gibson Dunn’s restructuring practice. He added that in the US lenders are well versed in the co-op structure and in many cases are forming them very quickly.

Case in point, Antares Capital rushed last month to sign fellow lenders up for a co-op on Evans Delivery following deterioration in earnings at the logistics company. In a matter of days, Antares secured 100% lender participation on the co-op created by Latham & Watkins, Debtwire previously reported.

Lender organization comes in response to publicly listed and financial sponsor-backed companies alike using loopholes in credit documents to restructure their balance sheets out of court to the detriment of all or some creditors.

“There’s a much greater level of awareness among creditors than years ago,” said Derek Gluckman, vice president and senior covenant officer at Moody’s Ratings. “You’re seeing the awareness manifested as they join co-op agreements, although still, any co-op agreements or how tight the docs are will vary depending on the nature of that creditor group and the negotiating power that they can summon.”

With the same cast of characters popping up in multiple situations, creditors are taking past history into account when deciding whether to invest in a credit or gaming out the best workout strategy.

“For investors in leverage credit, PE sponsor reputation certainly matters,” said David Forgash, head of leveraged finance at PIMCO. “LMEs can and do impact relationships with investors, especially when these are done opportunistically to capture discount for the benefit of their limited partners.  We can see this in deal pricing, where sponsors that have a higher percentage of defaults tend to pay a premium versus those that take a relationship approach to creditors.”

Earlier this year creditors to telecom magnet Patrick Drahi’s Altice USA signed on to an 18-month cooperation agreement following earlier creditor organization at Drahi’s Altice France. The European telecom group shocked lenders this spring by suggesting creditors would need to take part in a discounted transaction to reduce leverage. Altice France creditors to quickly signed on to a co-op that has repeatedly been extended.

Similarly, DISH DBS creditors united under a co-op following founder and chairman Charlie Ergen’s aggressive maneuvers to take assets away from creditors and launch a distressed exchange in January. This month, close to 80% of DBS bondholders reupped their co-op through March 2026 after DISH parent EchoStar struck a deal to sell the DBS satellite TV business to rival DirecTV contingent on creditors taking a USD 1.6bn haircut they oppose.

While co-ops unite creditors, they also potentially can limit investors’ liquidity as for the most part co-op paper can only be sold to other co-op participants or a buyer who is willing to sign onto the co-op. That could leave co-op bonds and loans trading at different prices than non-cop debt.

As long as there is large creditor participation, there shouldn’t be a liquidity issue, a second buysider said. Pricing between co-op and non co-op paper in many cases is tight, at least based on broker quotes.

Brokers are quoting Hearthside Foods’ term loan in a co-op at 74.75/76.25 compared to 74.33/76.33 for non-co-op term loan, according to MarketAxess. Telecom supplier CommScope’s term loan co-op paper is quoted at 96.92/97.58 compared to 97.12/97.79 for non-co-op paper.

Where a problem with a co-op can arise is if there are different types of investors in a group, particularly if one set of creditors bought debt at a discount and another set primarily bought at par, said a third buysider. Still, this buysider said they didn’t see why the co-op itself would block settling with a company.

Gibson Dunn’s Greenberg said co-ops are not crafted to prevent a company from reaching a deal to address its problems.

“The intent is always to engage with the sponsor, but to engage with the sponsor and the company on terms that are beneficial to everyone, not just to the sponsor,” Greenberg said.

The situation can be more complicated where the LME requires a tiered transaction that offers creditors different terms instead of the opportunity for pro-rata participation.

Some lenders are forming co-ops that cover just 51% of a loan, giving the group optionality to invite more creditors to join if a sponsor turns aggressive or structuring a tiered deal where the group secures better terms, Greenberg said.

The rise of co-ops comes as the structures of LMEs are changing in response to court rulings and companies turning to existing lenders to raise liquidity rather than new financing sources.

“I think that co-ops, in combination with some of the litigation that’s been going on in the Texas bankruptcy courts, might discourage uptiers, and it may be steering companies more towards down-drops and double-dips,” said Evan Friedman, head of covenant research at Moody’s Ratings

In the Texas Southern district bankruptcy court, Robershaw and Wesco Aircraft Holdings’s uptier transactions have been heavily litigated. Invitae’s uptier transaction has also been challenged in New Jersey bankruptcy court.

“In light of the various rulings that have come forth, there’s probably going to be less appetite to be on the more aggressive side of things,” Hwangpo of Ropes & Gray said.