By Robert Miller (University of South Dakota Law School)
When large, distressed entities restructure, they typically prefer liability management exercises (“LMEs”) over chapter 11 bankruptcies. Despite their contemporary nascence, LME paradigms have already evolved. First, they were binary. Now, they are inclusive, but unequal. Changes to capital markets, legal precedent, corporate control, and credit documentation drove these shifts. Guided by these catalyzing inputs, this article will examine LMEs’ genesis, explain their maturation, and forecast their future.
The winner-take-all nature of the initial LME vintage met stiff resistance from excluded lenders. The widely disparate treatment of these similarly situated lenders promoted bruising litigation. The aggressors, equity sponsors and their lender-allies, attempted to launder legally questionable transactions through bankruptcy cases, but the Fifth Circuit rejected the bankruptcy cleansing option. Facing borrowers’ divide and conquer tactics, lenders organized around cooperation agreements. These pacts ostensibly fortify lenders’ resolve in the face of sponsors’ pressure and solve collective action problems. They also mimic accordions: expanding to include all lenders to defeat third party funding offers or constricting to enable majority lenders’ preferred transactions.
LMEs’ tenor has mellowed. The lenders who were excluded under prior LMEs are now invited to participate, albeit on less favorable terms. Because the resulting economics are less divergent, the reward for a legal challenge is smaller and begrudging acceptance is common. By operating collectively, incumbent lenders outbid third-party financing offers.
The proliferation of LMEs shows no signs of slowing, but this latest iteration is unlikely to endure. The original propellants of the LME revolution: equity sponsor control, broadly syndicated debt, and loose covenants, all appear robust. The current supply-demand imbalance arms Sponsors with leverage to upend the status quo and retake the initiative. Challenges to cooperation agreements, growth of third-party financing, and an expansion of LMEs to private credit are all possible.
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Editor’s Note: This will be the HLS BRT’s last post of the semester, and we look forward to resuming posts in January 2026.