By Brett Seaton (The Wharton School, University of Pennsylvania)
Editor’s Note: At the time of writing this article, Brett Seaton was an undergraduate student at Wharton. We are pleased to share his undergraduate thesis on the BRT, and hope to periodically share more exceptional student work in the future.
Liability management exercises (LME) have emerged as the latest trend in the restructuring industry due to a confluence of factors in the corporate credit market, judicial system and macroeconomy. Creditors have pursued an array of solutions to avoid LME—namely adding blocking covenants in credit agreements for newly issued debt. For debt that has already been issued, lenders have only one option to regain negotiating leverage and avoid coercive exchanges—the cooperation agreement (Co-Op).
Since its roots in the SpectraSite restructuring, the Co-Op has evolved from a three-page lock-up alternative into a robust tool that lenders use in three distinct situations. Offensive Co-Ops are often assembled close to a contemplated transaction to enable a non-pro-rata uptier. Sponsors and management coordinate with signees of the Offensive Co-Op to build a bare majority and effectuate a value transfer from non-participating lenders. Defensive Co-Ops were the original Co-Op created in the SpectraSite restructuring and are still used today to prevent prisoners’-dilemma exchanges and to maximize lender leverage—often to the detriment of equity holders.
The fastest-growing variant is the Carveout Co-Op, which provides flexibility for disparate treatment among signees while still providing the advantage of collective negotiation. The Carveout Co-Op keeps the door open for broad participation but rewards early signers with economics such as backstop fees or advantaged exchange ratios to address free-riding and compensate for fees, liquidity constraints, and backstopping risk. Although its egalitarian treatment of signees is admirable, the traditional Co-Op fails to recognize realities on the ground of disproportionate expenses borne by active participants in the restructuring process. The Carveout Co-Op resolves this issue and restores balance to the credit market by creating an agreement tight enough to block coercive LMEs, yet flexible enough to reward lenders who shoulder the heavy lifting and might otherwise have pressed for richer recoveries at others’ expense.
Borrowers have responded to increasing Co-Op prevalence and sophistication with a myriad of tools. Anti-cartel provisions pioneered in the Warner Bros. Discovery 2025 bond issuance implicitly prohibit Co-Ops by restricting creditor coordination. It is not yet clear whether Warner Bros. bond issuance was the beginning of a trend or a one-time exception to the growth of Co-Op formation. Sponsors have also experimented with earlier process moves—pushing NDAs that can temporarily foreclose coordination. Attempts by borrowers to suppress Co-Op formation have met significant market resistance, indicating that creditors still value their right to organize and negotiate as a group. Evidence from market returns following a Co-Op announcement reinforces this view. The equity market reacts negatively in the immediate aftermath, firm value tends to rise modestly, and debt securities show mixed performance depending on their relationship with the cooperation agreement.
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