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Segun Olakoyenikan

Rachel Butt

This story is part of a series focusing on sharing data-driven insights and trends on LMEs.

When Sonrava Health launched a liability management exercise earlier this year to manage its debt stack, credit investors thought the offer was too good to be true. The New Mountain-backed healthcare provider opened participation to existing creditors, allowing the lenders to provide new capital through a drop down of assets and then offered a priority exchange at par to the existing term loan.

There was no exchange rate differential among the lenders, and the only transaction term that set an ad hoc group apart from the rest of the exchanging creditors was the backstop fee they received. By the time the deal closed, Sonrava got 100% lender support.

Sonrava’s pro-rata transaction has so far gained prominence as an extreme case of a friendly LME — which leading practitioners are calling the “LM 2.0” era, following up on the “LM 1.0” version of non-pro rata priming and/or asset stripping transactions.

Throughout 2024, the market witnessed the shift towards “kinder, gentler” deals where everyone gets a piece of the pie at varying terms. Such out-of-court restructurings typically get at least 90% of lenders to participate.

“If you have something that's pro rata, that you have a large group of creditors agreeing to, it can oftentimes be a better path to accomplish all of what the company is trying to accomplish,” said Brendan Hayes, co-head of capital structure advisory at Guggenheim Securities.

Fully pro rata LMEs provide equal treatment to all existing lenders by offering the same consideration to all lenders in proportion to their debt holdings. This restructuring approach is a form of friendly LME, which ensures open participation for all lenders with little or no differential economics between the steering committee and the broader lender group.

It is unlike coercive out-of-court transactions, where companies work with an exclusive group of majority lenders to restructure debt, always given both extra fees and higher consideration proportionately for their holdings than the non-ad hoc group. These deals often restrict the initial participation to the select group.

"There does feel like there’s additional emphasis on building consensus in LME transactions as of late,” said Ryan Preston Dahl, the restructuring chair at Ropes & Gray, the law firm that advised Sonrava on the deal. “What we’re seeing more typically, you’re offering something to everybody because when someone has nothing to lose they act like someone who has nothing to lose and it becomes contentious because it has to be contentious."

So far this year, at least 39 LMEs have been initiated in the US, according to data compiled by 9fin. Of these, 26 transactions (67%) were considered friendlier, including 22 deals opened to all lenders to participate and the remaining 4 securing a minimum of 90% lender support. They include notable examples such as WideOpenWest, STG Logistics, PluralSight and SI Group.

The LME data shows a broad increase in participation when compared with last year, when only 22 transactions were recorded. Despite the lower volume, just 36% of those deals were friendly. Among them was the surprising turnaround of Yak Access. The company’s private equity sponsor Platinum Equity injected fresh capital and gave lenders who previously accepted haircuts recoveries near par, causing the transaction to close with full lender participation.

Meanwhile, the proportion of exclusive deals to the overall transaction was also higher. Half of last year’s transactions were either restricted to an exclusive group of creditors or saw participation levels below 90%.

Notable among companies that launched LMEs in 2023 with select lender groups are Travelport, Robertshaw, Learfield, At Home, Rodan & Fields, and LifeScan. Meanwhile, deals done by Yak Access, West Marine and Premier Brands Group enjoyed 100% lender support.

The evolution of these transactions has been interesting as well, says Dahl—a former philosophy major who sees the LME world through an evolving lens: Every change sparks more change. There was the Serta open market purchase that gave rise to Serta blockers. Then the initial Serta blocker had holes that were taken advantage of with lien subordination, which was then fixed, and the market turned to claim subordination.

"That process is still evolving and is going to continue to evolve,” he said. “The working assumption on the company side is that the LMs goal is not to be mired in litigation, [but] to raise money, extend maturity, and/or provide flexibility and do that as efficiently as they can."

For excluded lenders, participation in transactions with cooperation agreements could sometimes feel like a choice between the devil and the deep blue sea. As multi-stage LMEs backed by co-op agreements become more common, companies can offer slightly better terms to lenders involved in planning the transaction. This leaves non-ad-hoc group lenders to either participate in the deal and exchange their debt at a steep discount or hold out, risking their collateral being stripped away.

This was the case with Magenta Buyer, which offered different economics across its capital structure. The Symphony Technology Group-backed company earlier this year secured 99.9% lender support for a new-money and exchange-offer LME that was heavily negotiated with an ad hoc lender group and major debtholder Elliott Management.

To bypass Serta blockers, the company executed an asset drop-down by transferring intellectual property to an unrestricted subsidiary and raising new money against those assets.

Elliott received the most favorable terms with offers allowing it to overtake other lenders in the repayment priority line. The asset manager was allowed to exchange its first-lien holdings for a second-out position in the unrestricted subsidiary at 89 cents. On top of this, Elliott was also given the option to exchange nearly a third of its second-lien loan into the first-out position.

The ad hoc lender group got a deeper discount for the exchange offer, which allowed them to swap their first-lien holdings at 85 cents into third-out positions. Minority lenders were also allowed to participate, but only at the least favorable terms. They could exchange their first-lien debt at 80 cents on the dollar, with just 15% allocated to the first-out position. The remaining portion could be exchanged into second-out and third-out positions.

"The market has recognized there’s a first mover advantage—it does take time and institutional resources and in theory you should be rewarded [for structuring a deal]—but it doesn’t have to be punitive,” Dahl said.

But how much of an advantage a majority lender group gets over similarly situated lenders is something that the majority will push at their peril.

Meanwhile, the choice a company makes about how it intends to restructuring its debt is not completely random.

“As each situation unfolds, institutions increasingly think long and hard about who's going to be investing alongside them in a backstop or otherwise and who may be left behind,” said Jayme Goldstein, partner and co-chair of the financial restructuring group at Paul Hastings.

Advisors to companies and their sponsors may choose between exclusive or inclusive deals, depending on the circumstances driving the restructuring in the first place.

“If the catalyst is maturity extension, then the holdout problem becomes a significant issue that needs to be addressed. You want to be as inclusionary as possible because you can't amend somebody's maturity,” said David Hong, partner in the financial restructuring group at Paul Hastings.

The case is different for companies looking to improve their balance sheet. They might consider closed transactions, with a smaller ad hoc group of lenders to secure a larger discount.

But there is a limit to how much discount they can capture with an exclusive deal.

That’s where more inclusive transactions come in, especially as one of the key objectives for companies doing deals with existing creditors is to maximize participation to capture discount, in addition to other benefits such as securing new funding and extending debt maturities.

As a result, an increasing number of companies and sponsors are becoming more inclusive in their deals to ensure that every creditor, at least, gets something, even if they may not be completely satisfied with the terms.

In this type of arrangement, companies can maximize the benefits of the restructuring process to reduce their debt burden. By involving all lenders, they can secure a greater discount compared to limiting participation to a select group of creditors who might resist unfavorable terms, such as exchange rates. This approach allows the company to achieve a better outcome by taking smaller concessions from many lenders rather than larger concessions from a few.

“There is still a benefit to the lenders who are leading the ad hoc negotiating committee, but that benefit is not as violent as we have seen before. The benefit now is more in the form of slightly better treatment, slightly better rights, fees, and so forth,” said Ronen Bojmel, co-head of capital structure advisory at Guggenheim Securities.

Litigation risk is another major reason why some companies are now choosing inclusive deals, regardless of how different lender groups are treated. Opening up participation to everyone means they can minimize the risk of legal disputes from lenders across the capital structure and maintain positive relationships with all stakeholders.

“I think that institutions focus on the fact that it is not a single-serving type of investment world that we are in right now. Investors do have lasting memories and will likely need to work with each other on future deals,” Goldstein said.

On the company side, protracted litigation comes at significant costs to the business, including reputational damage, high expenses and the considerable time spent in court. For publicly traded companies, prolonged litigation could erode their market valuation, potentially leading to financial instability.

“I think we are well past the initial phases of Serta Simmons, where deference to relationships and inclusion was not part of the overall calculation,” Hong said. Non-participating lenders of Serta 2020 LME challenged the validity of the uptier transaction, claiming violations of the “open market purchase” provision in their credit agreement. Serta was accused of conducting debt exchanges, rather than cash purchases, and offering the deal only to excluded lenders.

Even with the trend of opening transactions to all lenders and achieving high participation, litigation against borrowers has not completely disappeared, suggesting that friendly LMEs do not necessarily mean lenders were happy with the terms.

Two months after Del Monte struck an LME offering various terms to lenders, Black Diamond challenged the transaction on behalf of other non-ad hoc lenders, seeking to compel the food company to replace its board of directors. The litigation is unusual in the CLO-dominated loan market, where investors are generally hesitant to pursue legal action against such transactions.

As the market becomes more concentrated and shifts further toward friendlier transactions, companies and their sponsors may need to exercise greater caution when deploying aggressive strategies.

For the most part, troubled companies have used the threat of aggressive debt maneuvers to usher creditors into a desired LME path. There are some exceptions, such as DISH, Altice France and Instant Brands, which sparked investors angst after laying the foundation for controversial debt moves or moving valuable assets out of their reach.

There is a potential for these liability management exercises to reach an equilibrium, where the pendulum swings back to the era of more aggressive transactions.

“The coercion is critical to get people to participate when cash refinancing isn't achievable,” Bojmel added.

The return of aggressive transactions could also depend on the direction of the market. The performance of the broader leveraged finance market is closely tied to the types of transactions being conducted. Strong performance over the past few years has favored pro-rata deals, like Sonrava. But such transactions could easily get displaced with aggressive exercises during market downturns.

“When the market trades off and things deteriorate, it becomes more of an environment where each creditor is looking out for themselves,” Hayes said.

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