Liability management exercises (LMEs) are likely to increase in complexity and require ever-more of lenders' time and resources in the year ahead, although developments in 2025 indicate that the popular "uptier" structure may treat lenders more fairly.
Expect borrowers and their favored lenders to pursue initial LMEs, then follow up with second arrangements, according to Octus, a provider of sub-investment grade news, data and tools.
"Looking ahead, we expect to see more 'LME squared-type deals,'" where a company with ostensibly more robust [loan] documentation following an initial LME attempts a second out-of-court transaction, said Julian Bulaon, Americas covenants analyst and head of liability management at Octus.
In 2025, such transactions included Quest Software completing its initial LME in June and following up restructuring in August. The second transaction enabled lenders holding the lowest-priority debt to swap into higher ranking paper.
Looking ahead, we expect to see more 'LME squared-type deals'.
Better terms with uptier deals
In 2024, Apex Tool completed its initial "uptiering" LME, a popular structure in which select creditors receive better terms on debt swaps than others, and at that time S&P Global Ratings expressed concerns about the company's reliance on favorable economic and business conditions to meet its debt obligations. Those conditions have been volatile since then, and the struggling company--in a scenario other highly leveraged companies may follow--pursued debt exchanges through a second LME in October.
"We view these exchanges to be tantamount to default because in our view, lenders are receiving less value than the original promises," S&P Global said.
On the plus side for lenders outside the ad hoc group controlling the LME, Octus' research indicates that uptier LMEs became less aggressive in 2025, resulting in a less severe shift in value to the controlling group. Jared Muroff, head of special situations at Octus, said that the three uptier LMEs the research firm tracked in the third quarter were pro-rata in nature, distributing value equally across lenders. He cautioned that Octus' data may have missed private transactions, and the occurrence could be coincidental.
However, "it's nonetheless interesting to note that this comports with some market participants' expectations that LMEs would become more pro rata-ish," he said.
Those expectations were fostered at least in part by court actions in 2024 that were favorable to lenders excluded from the LME's controlling group. The actions included an appeals court decision on December 31 of that year that reversed a bankruptcy court's approval of Serta Simmons Bedding's uptier LME. Borrowers quickly adapted, however. Better Health Group and its lenders were coincidentally seeking to consummate an aggressive uptier LME, and following the court decision flipped to a novel "extend and exchange" structure to avoid the ramifications of the Serta decision, an approach echoed a few months later by Oregon Tool.
It's ... interesting to note that this comports with some market participants' expectations that LMEs would become more pro rata-ish.
In response to the extend-and-exchange strategy, Bulaon said, some loan documentation following an LME has included "Better Health blockers," when pro rata sharing requirements within amend-and-extend provisions are made a "sacred right" that requires consent from all lenders to be amended. The most meaningful response to extend-and-exchange and other efforts to circumvent pro-rate sharing, he added, has been to increase the use of cooperation agreements as a tool to bind lender groups to support their interests.
Borrowers push back
Borrowers have in turn sought to stymie cooperation agreements, Bulaon said, partly by inserting anti-cooperation provisions in debt documents, as well as through anti-trust challenges. Optimum Communication, for example, filed suit in November alleging that its lenders entered into a cooperation agreement to restrict its access to the credit markets.
In the year ahead, the courts may clarify when and how cooperation agreements are appropriate, a critical development for lenders.
"Because individual lenders have limited ability to unilaterally tighten already loose documentation, participation in the right cooperation group has become one of the most effective ways to defend against a non-pro rata transaction," Bulaon said.
