Liability management exercises used to be niche — now its everywhere in distressed practice. Yet somehow, nobody thought to write the playbook on how they actually work. Until now.
A new textbook, published by LexisNexis, is finally filling that gap. On this episode of Jane’s LME Addiction, Jane Komsky chats with Cassels Brock & Blackwell’s Matteo Clarkson-Maciel about what pushed him to organize it and Ropes & Gray’s Ed Downer and Sam Badawi on how LME practice differs across jurisdictions, and why you still need to know the basics in the age of AI.
Grab your copy of the textbook here.
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Episode transcript:
This transcript was generated with AI assistance. Report any material inconsistencies or inaccuracies by emailing podcast@9fin.com.
Jane Komsky
Hello, and welcome to Jane's LME Addiction, a Cloud 9fin podcast where we talk about all things liability management. I'm your host, Jane Komsky, and with me today to talk about the new textbook about LMEs, which I will add is possibly the only, but definitely the best textbook on LMEs in the market, is Matteo Clarkson Maciel from Cassels Brock & Blackwell, as well as Ed Downer and Sam Badawi from Ropes & Gray. Thank you all so much for joining me. So before we dive into the specific textbook, to talk about just a little bit about you and your practice areas. Matteo, since you brought us all together, I'll start with you.
Matteo Clarkson-Maciel
Great. so I'm a Canadian by birth, but spent the better part of my career in the UK and where I actually worked with Ed. And from that started my career at Kirkland, so Jane, a similar background on that, and then ended up at Wilkie where Ed was previous to Ropes and and from that returned back to Canada about two years ago now.
Jane Komsky
I'll bring you back on the podcast to talk about musical chairs again, which I love talking about on every LME podcast. But with that, I'll turn to Ed. Go ahead.
Ed Downer
Thanks for having me, Jane. So, yes, before I was at Ropes, I was at Wilkie where I took the credit for everything good Matteo did and I'll continue to do so as people enjoy this excellent textbook. And look, I've been in London practicing for 12 years and I was in Australia before that for my first six years. Always practicing in restructuring and insolvency and then of course more recently LME land.
Jane Komsky
And Sam.
Sam Badawi
Thanks Jane for having me. Now I started out about twenty years ago really as just a regular way cap markets attorney, but started sinking my teeth into the distressed space about I'd say fifteen years ago at this point and have not looked back.
Jane Komsky
I feel very similarly about my practice and my origin story, but with that, I'll turn to the textbook. So, Matteo, you were the true editor of this textbook. You reached out to each of the contributors. Ed wrote a chapter, and I'll let you actually say it, mentors you along the way. And Sam is with us to talk about the relevance of the textbook to just general LME practice. But with that, I'll turn to you, Matteo, and I'll say what made you decide to write a textbook?
Matteo Clarkson-Maciel
Yeah, I mean good. Look, I don't think anybody who dreams about doing a textbook with the exception of a few people who have written chapters here, I think it kind of came up as when I was moving back to Canada, and I think this will probably lead into a conversation that we talk about later.
When I was in London, Ed and I were thinking about LMEs, we're doing a lot of LMEs. It was the first exposure that I had to how to to structure these things. And I think one of the things that became quite clear to me was that there was really only two ways to learn. There was either you were doing them and you you were kind of learning through osmosis, or you were trying to scrounge together every law firm or 9fin article that was talking about really the cutting edge of an LME rather than here's from the foundation, how do we build up?
And then, where is the market currently? and of course, there are other chapters in other books that talk about LMEs. One I had in mind and certainly an inspiration to this was Michael Gatto's excellent book on credit investors. And I think in the same way that was designed to teach people how to think about credit investing.
I wanted something that was really going to be used as a tool for firms for myself, frankly, like how do you think about these things in a structured way? And how do you you have a resource that you can say to a junior that's doing a transaction with you, like, okay, go off and read this. You'll have a better understanding of what these things are because They're so complicated, right? I mean, we all have come to this from different backgrounds and there's kind of parts of capital markets and litigation and regular restructuring and contractual interpretation that all kind of feeds into what an LME is.
Jane Komsky
Definitely. And I think that actually brings a good question over to Sam. You mentioned that you started your career as a capital markets attorney and then slowly made your way into the world of LMEs. How did that transition work for you? At what point did someone say, Hey, we're doing this thing, we're structuring this, we need your help. I presume you were already an expert in capital markets when somebody brought you into a deal. What was that like for you and how did you learn about it?
Sam Badawi
Yeah, sure. No, absolutely. I started my career at Millbank, and so you really couldn't help but get involved on the distress side. And then I think it was maybe 2011, 2012 when we started going through this phase of, initially maybe I'd say restructurings, but with a tinge of how do we get the financing in using capital markets, and then slowly also building into the LME space.
It required kind of nuanced thinking. I think usually it used to be run by regular way finance attorneys on the loan side, but I think the capital markets were open. We started doing rights offerings in ways that I think just had not been done before in that context. and that was at least my entryway into it. And then we started dealing with public companies who needed the cap markets expertise. And look, it became kind of, you have to be a master.
But it was absolutely interesting. And, at some point you kind of say, this really is what I want to do for the rest of my life. This is interesting, it's unique. Every deal that comes in is a puzzle that you try to solve. and you're just dealing with very smart clients, very intelligent advisors on the other side. and everybody, as much as people like to say it's more confrontational, I think it's actually collaborative at the end of the day. Though you're still trying to protect yours and your client's interest.
Matteo Clarkson-Maciel
I think that's a really good point, Sam. in the sense that I always think about LMEs in two ways to do what you were saying. The first is I think it is a puzzle. There's parts missing and you're doing it backwards. And I think you don't know what the image is gonna be until you have put it together and flipped it around. But that's the exciting thing about it. I think everybody who does this thinks about it that way.
And the other thing that I actually thought about, and Jane, this kind of goes back to at least the most recent podcast that you've posted at the time of this recording, which is you were talking about Puerto Rico and its restructuring. And, one of the things that I thought was kind of interesting was the origin of LMEs, just as a phrase, kind of came from that. And it's came in a similar way that Sam was just describing, which was it came through sovereign restructurings where you don't have a bankruptcy proceeding to manage the the liability of the state and and it then bled into public markets where people were using that phrase to describe this and eventually now come to just any out-of-court process that is of a certain category.
Jane Komsky
Yeah, and going off of what you were saying, that is like a puzzle that you have to work backwards for, for me, any time I would hear about an interesting transaction in the market, it was usually through litigation. And so then I would pour over the different briefings to be like, okay, and they did this exactly because that was the closest that you could get to understanding how someone structured a deal, which was hearing a litigator recount those facts.
Usually otherwise the doc is private. And so having a textbook that can kind of walk you through like, okay, you heard this happen. Well, probably it's similar or branching out of something that's covered here. And when I think of how opaque certain documents are, at least I feel like in the US, there are a ton of loan documents that are pretty public. Is that the same in Europe, Ed?
Ed Downer
Absolutely not. Europe is a substantially different jurisdiction, especially when it comes to disclosure of credit agreements, amendments to credit agreements, that sort of thing. I can remember the first time I had access to the various tools that are available to undertake research of US issuers based on their SEC filings. And I was always astounded that indentures would be made public and amendment and subs to indentures would be made public. It's a mystical and very public world that you live in.
But no yeah I mean Europe's so much more opaque, and so the art of the LME and the solving of the puzzles often is undertaken in an entirely private basis. The parties to the transaction mostly know about it, but of course as some LMEs involve many parties finding out only when public accounts are subsequently filed as well. So that's a substantial additional challenge when we encounter the practice and the transactions in Europe.
And we are seeing a bunch of litigation right now, including of European LMEs, which I am sure you and all of your listeners are finding very enlightening.
Jane Komsky
Yeah. Can you talk about the chapter that you contributed to the book and why you chose to focus on that area?
Ed Downer
So personally it was really easy because Matteo wanted a chapter addressing the local law features and the local market features of LMEs. And so our chapter is superb. It's especially good because I only had to write a third of it. So we cover Canada, which Matteo wrote, the UK, which I did, and and the US, which Jeff Pallitz, who's a Wilkie restructuring partner, contributed.
And so what we're trying to illustrate is the jurisdictional importance. So firstly the market into which your debt instrument has been issued, how that bears on the nature of the transaction that you might engage in. Critically, for example, everyone talks about a lot more relationship-based financing being undertaken in Europe than is done in the US, right? So that's a relevant feature to whether and to what extent LMEs can be done on a non-pro rata basis, for example. and then we go into the legal aspects. So who is your counterparty? Where are they incorporated? What are their particular concerns?
And there have been a very large number of transactions now in europe where you do have to consider the not just the governing law of the credit agreement but the intercreditor agreement as well and then the law of incorporation of the relevant parties right and understanding that and the cross-border dynamic is something which European lawyers are extremely well accustomed and well suited, right? And we take the highly developed and extremely well sought through US technology from prior LMEs, right? And we try and apply that to suit European circumstances, which is a hugely complex puzzle, as you put it earlier.
Jane Komsky
Yeah, I will acknowledge that I found that chapter particularly helpful as that is admittedly a weak point in my understanding. But taking a few steps back, Matteo, I'd love for you to just walk us through how you structured the book and how you decided who would contribute to the book. Give us a window here.
Matteo Clarkson-Maciel
Yeah. So look, I know you haven't mentioned this just yet, but Jane you are a contributor as well–
Jane Komsky
Obviously the best chapter of the textbook, no offense Ed.
Matteo Clarkson-Maciel
Of course. Certainly the quickest delivered and we can talk about that in a moment. But the theme behind the book was you may not recall this and I admittedly can't recall the name of the book, but there was a there was a book that was written by two Kirkland lawyers and they wrote a book basically on structuring venture capital and private equity and throughout the book they have a fact pattern that they use to walk you through how does this transaction look with different circumstances.
And I always thought that was a great way to frame a textbook, mainly because I think if you start speaking in the abstract and you say, well, a drop down by designation, designates new o and new co moves over here and there's another new co and it gets confusing. And so the whole book is designed to hang around a single fact pattern.
Now, if I haven't done my job well, then maybe there are parts that don't do that. But generally I think we've been successful in corralling twenty odd excellent concrete contributors to writing or or I suppose rowing in the same direction. And so that single fact pattern starts off the book and it then leads through the rest of the book in this general format, which is, you have the introduction, you have what is an LME, like how do we differentiate it from a workout or a court process.
And then I think the other thing that's important from a first principal's perspective is what's the documents that you are using to construct an LME or or consider an LME? And so that first part also discusses covenants. What kind of covenants are key here? How do they interact with one another? What are the provisions for changing those covenants? What are the provisions for looking to implement essentially an LME, right?
From that, we then have a section that talks about the actual common transactions that you see in an LME, chapters on drop-downs, on up tiers, hunter-gatherer transactions, that sort of thing. And then finally, there is this section that talks about the cross border elements, where Ed's chapter is, as well as what are the alternatives, right?
What are we looking at in terms of an alternative to an LME? And typically that is a court process. And so we've had experts from each jurisdiction write on the common court processes that exist there and how they rank up essentially. There's a part that talks about what are the successes and failures of LMEs to date.
Jane
Yeah, I think that should there be another edition of this book, I think it'll be a particularly interesting chapter to draft again in a few years, as LME has drastically changed. I mean, already I've thought from the time that you said okay, it's been published, there could have been a chapter I was just hearing about this interesting facet. And I don't know, Sam, if you're also experiencing that, like when you get into a room, people are just like let's come up with a new direction for this. The old one didn't work for this company. Are you constantly just putting your heads together and saying should we change this? Or do you feel like we've hit a good stride within the LME landscape?
Sam Badawi
No, I'd say absolutely. I mean, look, we were actually strategizing on a company that will remain nameless with a financial advisor that will remain nameless yesterday and think we've come up with something even hopefully more unique, but time will tell. I mean that's the thing – the space is evolving so quickly but I think to better understand and figure out how to move to the next step, you need to understand what has been done before.
And that's why I think Matteo's book is actually pretty amazing because as he mentioned earlier, when we have a junior associate coming in, you have to scrounge around for the information. And I've got a little kind of library of the required reading I will give someone to kind of start to get them acclimated to the space.
Jane Komsky
Is it just 9fin’s website?
Sam Badawi
A lot of it comes from 9fin and some presentations that we've done, some material that we've done, in client teachings. And I love the fact that now we have everything condensed in one place. The book really kind of gets into clarifying the process in an easy way that is not available elsewhere.
Matteo Clarkson-Maciel
I think what's so fundamental about it is that you're really using just a set number of fundamental principles. You're using legal concepts to achieve these. And I know that may be scary to people who aren't lawyers, but I think that's really what it is. Like you're using a basket or however you want to describe that, right? Or you're essentially interpreting a clause in an agreement. That's what using a basket is.
And then you're saying, okay, what kind of legal concepts of security, of subordination, of assignment, what kind of tool, how can we use these tools to actually achieve the outcome that we want? And I think that that's really fundamentally what these are. They aren't gymnastics for the sake of it. I think they're being used to achieve a commercial outcome.
Jane Komsky
No, one hundred percent. And I think the way that you structure it also of no matter what transaction is done and no matter where this goes, whether or not there's more say debt for equity component that comes in, you're still gonna need to understand fundamentally what is it up to here, what is a drop down, what has been done in the past that has brought us to where we are. Nobody's going back to the whiteboard and saying let's start from the beginning.
I mean, out-of-court transactions were obviously always available, but the true LME practice that's talked about in this book definitely has come a long way in the last maybe five to ten years. But the way that you structure it, I think, will make it very easy to adapt, which I think is really cool.
Matteo Clarkson-Maciel
Well, thanks. I think that you're right. I think it has come a long way. And I think there are people who will say, how are these different from other transactions and from exchanges or consent solicitations? And I think that the fundamental difference, at least in my view, is that an LME describes a category of transactions that may themselves involve a consent solicitation or an exchange, but they aren't like It's not the other way around, if that makes sense.
Jane Komsky
No, it makes a lot of sense. and so taking just another step. I assume that most of my listeners are generally US based. I don't know if that's true but can both you and Ed talk a little bit about one? I mean, for you who's currently situated in Canada, are you seeing a lot of LMEs? And same and I mean, I know they're picking up more in Europe, but Ed, I'd love for you to just talk about how big a market like share when you're pitching clients, is that usually where you start?
Matteo Clarkson-Maciel
Yeah. It's a good point. I mean, when I moved here, there were a lot of people who said, for context, I always thought of myself, I think, in the same way that Ed does, probably as a special sits lawyer. And when I moved here, I would use that phrase and that has in some circles a different connotation in Canada. There it links more with shareholder activism and the equity markets, which are more developed, I would say, in Canada than the debt markets are. As a result of just market growth in Canada, banks and relationship banking is a lot larger. And so you see LMEs. I think, ironically, some of the more famous LMEs are Canadian companies with American debt. Mitel, for example, Cirque du Soleil as well, is I think probably one of the older ones.
They still happen, but I think they happen less commonly on more traditional BSL paper that that exist here in Canada. They’re more commonly or more frequently used in bonds. But I think that is increasingly changing. I mean, in the last two years that I've been here, we've had increasingly clients come to us and say from both perspectives. We're thinking about how we can use this tool. We've heard about this from the US or from elsewhere. And alternatively, from funds who say, we want to make sure that we're protected against this is the paper that we're looking at strong enough to shore up a potential transaction. And so I think there's like an increasing relevance to it.
I think the uptake has certainly been much much stronger, but I think the vast majority of them still remain Canadian elements to US transactions. And I guess to Ed's point, right, this is why we wrote the chapter. Those are still relevant. Like you still kind of need somebody from there to say, well, if you have a Canadian entity in that structure, you may want to consider looking at what the obligations are of the directors here in Canada, for example. Ed, I don't know what your thoughts are. Certainly it's been a lot busier in Europe.
Jane Komsky
Also, Ed, I'm gonna refine my question to you and ask. I assume that you're seeing a lot of LMEs, but what flavor of LMEs? Are we seeing more inclusive? Are we seeing more appetite for aggression? What are you seeing?
Ed Downer
Firstly, Jane, there are at least two non US listeners to your podcast. I think right now we haven't got the volume or the sophistication to have developed LME 2.0, LME 3.0 wherever you guys have got to in the States.
I think there is still a lot of creativity being explored and deployed in Europe. I think a lot of the investors who participate in the European market are the same as the investors who participate in US capital markets, right? And so it's no great surprise that the transactions are being explored, but we have so many differences, for example, a traditional English credit agreement basically precludes open market purchases such that the controversy from the US precedence doesn't arise and our intercreditor agreements are much more robustly structured such that layering is complicated.
But we've seen a huge amount of gymnastics deployed, including, interposing concurrent intercreditor agreements, governed by the laws of different jurisdictions to manage the risk of minority protections. There are a bunch of cases under English law which are of concern, right, when we consider the robustness of the transactions that are being explored. So just I mean we see a very aggressive posture with a lot of transactions. It's just the implementation challenges in Europe just seem so much greater. And as a result, we're just exploring all sorts of different angles all of the time.
But look, we've seen multiple LMEs conducted by English listed companies, right? And if you've penetrated that space, right, it really is a necessary factor for issuers and creditors to consider in every transaction.
Jane Komsky
On a completely different note, I will say that participating in this textbook actually brought me back to my big law experience because Matteo initially told me that I had a month, which seemed like a short period of time to write my chapter, and then turned around and was like, actually, it's more urgent than that. It needs to be about two weeks. And I was like, I don't think I can do this, but here we go. And which I feel like nobody had said to me since I was like a junior associate, like, this is not urgent, do it when we like, and then next thing, no. Fire drill. This is a priority.
Matteo Clarkson-Maciel
You did it brilliantly.
Jane Komsky
And so, which brings me to I think possibly my final question for Matteo, which is besides for obviously, telling someone one period of time and then switching it, were there any lessons learned for you in writing this textbook? Is there anything you would have done differently?
Matteo Clarkson-Maciel
I don't know. Ask me in a few months once we've had some distance from the project and my involvement in it. I certainly wish that I hadn't been forced to and I will admit in my defense I was forced. So for context, we had connected on I think something unrelated and I said I would love to have you involved.
And yours was the final missing piece from the book. And, I'm not trying to flatter you here. I think it's a very important piece. And it was also one of the ones– so Jane wrote a chapter on on co-ops, right? And this chapter was one of the ones that was developing the quickest. And so it kind of did need to be completed near the end. But it was near submission and we were kind of almost ready to just go without it.
And we then connected and that's how it ended up playing out that I gave you two weeks instead of a month because our publisher said, We're not waiting. Like we, we have to get this thing done or it will never get done. And for context, I mean this has been a labor of love for a long time. Nearly coming up on a year and a half, I suppose.
And so it's been constantly evolving and yes, thank you for putting up with it. I was so thrilled that you were able to reach that deadline because there were so many deadlines that myself included just kind of blew through because you have real deals that you're working on and other things in life. So thank you.
Jane
No, of course. Thank you for including me. It's like you said, I only did one chapter, but it really was a labor of love and thinking, do I have everything here? And I mean, something you said earlier, which was that you provided an example to use. I mean, that really made it a much easier process because I'm sure Sam and Ed have experienced this. That whenever somebody asks you to explain something, you immediately go to okay, let me draw some boxes on a piece of paper and walk you through. Here's how this works.
Because you can't really explain any of these things without a clear example. And to have one consistently throughout the book, I think really just enhances it for whoever is reading it because it just makes it so much easier to understand and to explain. And so you really made my job a lot easier. And I thank you for that. Yeah, so I guess my final thing for you guys is anything that you think our listeners should be aware of that's coming in the world of LMEs that either is included in this textbook and you want to highlight or might not be.
Sam Badawi
Maybe I'll jump in from my perspective at least. I think you won't know where you need to go without understanding how you got there in the first place. I think we all acknowledge our practice, our space is almost like a whack-a-mole type situation where, there's a whole everybody rushes in to plug it and maybe not in the ideal way. So we'll find another kind of loophole to get there.
And I think kind of seeing that play out and watching that progression and what's written about, how it's explained. That is how you become better at doing this and kind of figuring out how do I get to the next step? And that's why I think it's super helpful.
Ed Downer
I would just say from the European perspective, because we're a little way behind, right? The European process. What we haven't yet seen is someone explore an LME which has subsequently collapsed into a bankruptcy of some kind in Europe.
And I think having a stricter set of fiduciary duties across most jurisdictions in in Europe, and seeing the interplay of those, I expect we will start to see that percolate through the system in time and it will be very interesting to see whether case to case law develops in a way that changes LME practice coming forward.
Do I know of a particular example where that's coming? No, but I'm sure by the time the second edition of the book is penned, we'll have some grist for the mill.
Matteo Clarkson-Maciel
That’s a great point, Ed. and I just want to talk on this, Jane, about something that we actually talk about in the book is this distinction between the type of LME. Obviously, people know of drop downs and up tiers. And I think those are really the technique of the LME, but I think there's a more macro view of What is the LME trying to achieve? Is it reactive or is it proactive?
And I think you see in the US kind of a blend of these two things. You see some people using LMEs in the knowledge that they are going to go into bankruptcy, and you see some people using LMEs in the knowledge of trying to avoid bankruptcy.
I don't know if we have seen situations in Europe where they have done it in the knowledge of going into bankruptcy, and that's probably because of those directors' duties. That has has resulted in, I don't know if it's more conservative, but it certainly has been more preemptive. Earlier in the credit cycle are these situations being examined in Europe. That's for a whole host of reasons. You can read why in the book.
I think the last thing that I'll say is and I thought of this because of something Sam was saying. I think the hot topic in just everything right now, right, is AI and how it is influencing the way that people are doing legal practice and everything. And I think increasingly people are going to use to the extent that they haven't already, used AI to they'll feed it an indenture and they'll say, How can I create an LME, right? And it will be very sophisticated in its answer to say, well, this is one of the ways that you can do this.
And funnily enough, I was playing around similarly with that a few months ago. And I think you really actually need to know the plumbing yourself in order to be able to do that, right? You can get led down, this is the thing with AI everywhere, but you can get led down a garden path here where it can say, yes, you can go off and do this, or no, you can't do that because this provision says this. And the only way that you can correct it is if you say, well, actually, yeah, that's fine, but how about the indenture on limitations on indebtedness that says blah, blah, blah.
Jane Komsky
I have had the exact same experience and it always responds, good catch. And I'm like, you can't have that if you're promoting. I mean, granted, I'm not promoting this to clients in any way, but it's not there yet.
Matteo Clarkson-Maciel
Yes. And it may well be, right? It may well come to that point. That would be my commentary. Is there still relevance in understanding these things in the minutia that we all deal with in our trade.
Jane Komsky
Couldn't agree more. Well, thank you so much for both including me in this book, and thank you all for coming on to talk about it. And thank you to our listeners, just wanted to mention the book is now available for purchase. Lexis is the publisher, and there will be a link in the show notes. And so again, thank you for listening. And if you have any questions, please reach out to podcast@9fin.com. Thank you again. Bye.