From Hostile Restructurings to Managed Inequality: How Liability Management Exercises Have Evolved

Over the past decade, liability management exercises (‘LMEs’) have moved from the fringes of restructuring practice to its center. What began as a set of aggressive, controversial transactions has evolved into a dominant restructuring mechanism for large firms. This development has important implications for how we understand modern restructuring governance, creditor coordination, and the shifting balance of power between financial sponsors (‘Sponsors’) and lenders.

• From exclusionary warfare to inclusive inequality

Early LMEs were widely described as ‘lender-on-lender violence’. Borrowers and Sponsors exploited flexibility in credit documentation to consummate exclusionary transactions—such as uptiers and dropdowns—that dramatically subordinated non-participating lenders. These deals were often negotiated in secret with a small subset of creditors and produced starkly divergent recoveries among similarly situated lenders.

A useful historical foil is the coercive exit consent, which emerged in the high-yield bond market as a tool to pressure minority holders to tender into exchange offers. Exit consents penalized holdouts by stripping non-economic protections—such as covenants—while they generally preserved pro rata treatment for participants. Even at their most aggressive, exit consents operated within a shared understanding that similarly situated creditors would receive equal economic consideration on their claims if they did not holdout. LMEs depart from that baseline. The initial version of LMEs did not merely coerce participation by degrading holdouts’ contractual protections; they routinely subordinated excluded lenders who held the same pre-transaction claims. The distinction between exit-consents and LMEs highlights a deeper transformation in restructuring norms: coercion is no longer cabined by pro rata treatment, and unequal economic outcomes have become a normalized feature. Unsurprisingly, excluded lenders were unwilling to accept this shift. Their legal challenges generated extensive value-destroying litigation.

The litigation risk proved to be too great. Some high-profile attempts to use bankruptcy proceedings to ‘cleanse’ controversial LMEs ultimately failed. Rather than retreating from LMEs altogether, lenders and Sponsors adapted to make LMEs more inclusive. 

The key development was the rise of lender cooperation agreements (‘co-ops’). Co-ops are private contracts among lenders designed to counter borrowers’ divide-and-conquer tactics. They coordinate negotiation positions, restrict side deals, and channel communications through a unified group. In doing so, they reduce litigation risk and improve deal certainty.

Crucially, co-ops are rarely pro rata. The dominant structure today is inclusive but unequal. Most lenders participate, but early-organizing or well-connected lenders—often steering committee members—receive better economics. This preferential treatment compensates them for organizing the group, accepting trading restrictions, and forgoing more aggressive exclusionary transactions. Sequential bargaining preserves these benefits while still inducing broad participation. The result is an LME baseline that looks orderly and consensual on the surface, yet continues to distribute value unevenly.

• Financing competition and the role of private credit

Financing dynamics further reinforce this convergence. In the LME context, third-party private credit funds routinely offer ‘deal-away’ financing—alternative funding proposals designed to bypass incumbent lenders. Although most LMEs are ultimately funded by existing lenders, the threat of outside financing plays a critical disciplining role, improving pricing and terms.

Over time, however, third-party lenders have become less willing to serve as uncompensated stalking horses. As incumbent advantage has hardened, outside lenders increasingly demand commitment fees, break fees, or expense reimbursement. Competition persists, but only when it is rewarded.

• Looking ahead

The forces that gave rise to LMEs are durable. Sponsor-owned portfolio companies dominate the large-firm distress landscape. Credit documentation remains permissive. Even when lenders close loopholes, creative restructuring professionals invent new LME structures leveraging other provisions in the dense credit agreements. Moreover, courts continue to apply strict contract-law principles that favor borrowers and Sponsors when evaluating lender-borrower disputes. Private credit markets continue to expand. Against this backdrop, LMEs are unlikely to recede.

Future contests will instead center on the structure and legality of co-ops as well as the growing role of private credit as both a competitive threat and an affiliated financing source. Far from being a temporary deviation, mature LMEs illustrate how modern restructurings function when coordination, competition, and litigation risk are mediated entirely through contract.

The full paper can be accessed here.

Robert W Miller is an Associate Professor of Law at the University of South Dakota.