While liability management exercises (LMEs) in the U.S. were less prone to creditor-on-creditor violence last year, aggressive LMEs have persisted and recently even skirted legal roadblocks, while Europe's first aggressive LMEs are now being tested in court.
The U.S. Fifth Circuit Court of Appeals'
An aggressive LME by primary-care Better Health Group was about to reach fruition when the appeals court's decision arrived, prompting the Kinderhook Industries-backed company to flip to a different structure to avoid ramifications from the Serta decision.
"If advisors to the sponsor community wanted to send a clear message as to whether or not they would be cowed by the Fifth Circuit's Serta Simmons decision into slowing the liability management train or at least offering minority lender better economics—it can't get any more crystal than the change in tact in Better Health," according to 9fin, a provider of debt-focused data and analytics.
Their message clearly was 'no,' and a month later Oregon Tool and a majority of its lenders also adopted the "extend and exchange" structure pioneered by Better Health, indicating that non-pro rata LMEs are continuing.
Europe on a different pace
While the U.S. is entering its third year of aggressive LMEs, Europe may be just starting. European courts and a more tightly knit lending community have tended to promulgate more consensual debt restructurings. One of the potentially first non-pro rata LMEs, Altice France, for example, told secured and unsecured lenders a year ago they would have to accept a lower value for their bonds, but they quickly banded together in a cooperation agreement. In late February 2025, the company announced an out-of-court, consensual restructuring that significantly reduced its debt and extended its maturities in return for providing creditors with equity stakes.
Two LMEs by European companies, however, have resulted in disgruntled lenders pursuing litigation. Last April, Luxembourg-based packaging producer Ardagh Group announced entering into new senior secured loan facilities provided by Apollo Capital Management, a key promoter of aggressive LMEs in the U.S., that totaled more than $1 billion, according to Bloomberg. The drop-down LME provided Apollo with all of the company's collateral and allowed it to collect Ardagh's existing notes and swap them for new debt, known as a "hunter gatherer" maneuver.
Lenders left out of the transaction, however, saw their debt lose value, and earlier in March hedge funds Arini and Canyon Partners filed suit in New York, alleging that Ardagh Group's restructuring siphoned value away from creditors.
Last November, the New York courts became the venue for more LME-related litigation involving Hunkemoller. Three hedge funds alleged that the Dutch lingerie specialist and its creditor, Redwood Capital Management, violated their rights in an up-tier exchange.
The outcome of the suits, not expected until later this year, could impact the extent to which aggressive LMEs take hold in Europe. Jennifer Pence, a senior credit officer at Moody's Ratings, said plaintiffs in the Hunkemoller suit allege in one argument that the company violated the payment-for-consents bond covenant, investor-friendly language that no longer exists in most bond documents today but did in the defendant's.
"Our interpretation is that minority noteholders probably should be protected, although we can't say what the court will ultimately decide," Pence said.
Skirting secondary market rules
In the U.S., LME-related litigation is common. The Fifth Circuit's year-end Serta Simmons decision said that borrower's loan documentation, like most loans today, provided an exemption to pro-rata lender treatment by repurchasing the loans in the open, secondary-loan market. Instead, Serta repurchased the loans in a private transaction that was not a stipulated exemption.
"By transacting with the participating lenders on a private basis in a way that was not open to all sellers of the old loans, Serta avoided the secondary market altogether and violated the excluded lenders' right to ratable repayment," said law firm Chapman and Cutler, in an analysis of the decision. "The Fifth Circuit's decision provides minority lenders with more support to challenge liability management transactions to the extent they rely on 'open markets' language to offer senior debt on a non-pro rata basis."
In light of that potential obstacle, Better Health and its advisors, law firm Davis Polk and investment-bank Houlihan Lokey, replaced the LME's Serta Simmons structure with an "extend and exchange" strategy. It extends the maturity date of the debt held by the steering to create a new class of debt.
By creating a new class of debt, the borrower is arguably not subject to the pro-rata sharing provision. Julian Bulaon, covenant head of liability management for Octus, a provider of credit information and analysis, said that holdouts in the Better Health restructuring recently retained law firm Selendy Gay.
"So maybe we'll get a resolution on the permissibility of the extend and exchange maneuver sooner than later," Bulaon said.
Carving a third path
He added that another court decision December 31 for Mitel Networks potentially provides a third way for borrowers to pursue non-pro rata exchanges. Mitel's loan documentation prohibited non-pro rata treatment of lenders except in connection with certain permitted loan purchases which, unlike the Serta Simmons open-market exception, did not include a requirement to purchase loans in the open market.
Steve Wilkinson, managing director at S&P Global Ratings, said he anticipates non-pro rata LMEs adopting double dip, peri-plus or other structures to transfer collateral to the benefit of majority lenders. However, the success of minority lenders in recent litigation could temper the so-called creditor-on-creditor violence.
"If it prompts less lopsided, more pro-rata restructurings, even though there's a lot of room for improvement, it would still be positive for the overall market," he said.
