Leveraged finance deals are starting to incorporate language that would discourage lenders from hiring particular law firms to represent them in any future negotiations, according to several 9fin sources. 

This could help sponsors smooth negotiations with lenders — for example, in a restructuring scenario — by avoiding counterparties they may have clashed with in the past. But for lenders and their counsel, it represents yet another effort to reduce their negotiating leverage. 

We spoke to seven market participants who said they have been made aware of this new language in recent weeks. Some sources argued that it may not be enforceable. But most agreed on one thing: it is another consequence of today’s highly competitive and supply-starved market. 

Private equity sponsors have historically implemented provisions, such as so-called DQ lists, to stop certain lenders from participating in their deals and/or purchasing the debt of their portfolio companies in the secondary market. Extending that concept to lender counsel is a new development — and in some form it has already cleared the market, sources said. 

These new provisions would make it at least slightly more difficult for certain law firms to organize lenders for a potential amendment, LME, or restructuring, among other legal actions. They are being proposed in broadly syndicated loan deals and private credit transactions, with at least two such deals currently being negotiated, sources said. 

Is it enforceable? 

First, we should acknowledge that DQ lists targeting lenders have evolved in recent years, as out-of-court restructurings have become more widespread. 

Recent examples include Pretium Packaging‘s restructuring, in which the company’s sponsor Clearlake Capital blocked loan-to-own investors from purchasing its debt, and Carlyle, which maintains an in-house list of disqualified lenders that it applies across multiple investments. 

To target law firms, two different formulations have emerged so far, sources said. The first is naming specific counsel that lenders should not hire. In the second formulation, the borrower essentially gets a one-time veto right to block lenders’ choice of counsel. 

However, sources familiar with the wording of these provisions noted that there is no explicit enforcement mechanism in the credit agreement. One suggestion is that whichever formulation is used, all it would enable the issuer/sponsor to do is to not pay for counsel fees (similar to designated counsel in a primary debt issuance). 

Typically, creditor counsel gets paid by the issuer if there is an active negotiation occurring with the company. Lenders can, of course, elect to pay their own counsel — but that seldom occurs, as they generally don’t want to foot the bill, sources noted. 

Sources also suggested that any attempt to outright block (as opposed to just discourage) lenders from choosing who they want to represent them could be unenforceable: one lawyer noted that preventing free choice of counsel could potentially be seen as unethical.

How we got here 

The rationale for disqualifying certain lenders is pretty clear: sponsors don’t want opportunistic lenders or aggressive competitors to come into a capital structure and potentially skew the outcome of negotiations with lenders. 

But discouraging lenders from working with particular law firms is more controversial, said sources. “We and our clients generally take a view that they're adequately represented and it doesn't really matter who's on the other side,” a lawyer told 9fin.

Some sources noted that these law firm DQ provisions could also reflect sponsors’ preferences against certain firms for more niche reasons. They could have had negative interactions with particular firms due to fees, or the temperament of certain lawyers, for example.

The broader context, of course, is that liability management has blown up in recent years, spawning new legal technology such as co-op agreements among lenders. This makes law firms an even more powerful force in credit markets, and it’s understandable that some sponsors might want to avoid facing troublesome adversaries over and over again.

Some sources noted that disqualifying law firms could be a way for sponsors to sneak anti-co-op positioning into their deals. 

Co-ops have exploded in popularity since 2023 and have proven effective in protecting lenders against savvy sponsors who can financially engineer ways to pit lenders against each other. Groups of lenders form before proceedings begin and negotiate as one, strengthening their position to recover the debt. 

But in recent months, sponsors have been looking for ways to effectively defend against co-ops, especially as the legal defense for the strategy grows. Anti-co-op language has not yet cleared the market, but discouraging lenders from hiring law firms that are co-op experts could achieve the same result. 

Sources noted that the relatively narrow scope of this new language could explain why lenders appear willing to allow it to clear the market. 

“This is going through, as opposed to anti co-op language, because it is so much more limited,” another lawyer told 9fin. “It’s the same thinking, but it's more specific. The more narrowly you prescribe a solution, the more likely you are to get people comfortable with it.”

The other — and perhaps more obvious — explanation for why this language is getting through is that the market is extremely competitive right now, with substantially more demand than supply.

This isn’t the first type of concession lenders have given in recent months: some lenders have recently sacrificed call protection in an attempt to keep deals on their books, while others are doling out event-of-default cures for companies facing more turbulent times.

Looking for more on DQ lists? Check out our Cloud 9fin podcast, with guests from Mudrick Capital Management and Akin Gump, on the the goal of DQ lists, whether they work, and the implications for sponsors and lenders involved.

Join the leading firms already using 9fin — request a free trial here.