Lessons from the Convergence of Corporate Restructurings

Liability management exercises (LMEs) have become the defining feature of modern corporate distress. Once viewed as a contractual alternative to Chapter 11, LMEs increasingly resemble bankruptcy itself. In my forthcoming article, ‘Lessons from the Convergence of Corporate Restructurings’, I argue that the two principal restructuring systems for large firms—out-of-court LMEs and in-court Chapter 11—have converged around a common model: transactions that are broadly participatory yet distributionally unequal, where powerful constituencies often capture outsized benefits. That convergence creates a research opportunity. Because LMEs operate largely through contract rather than statute, their evolution offers a natural experiment for improving Chapter 11 practice. Bankruptcy should harness the market forces that shape contractarian LMEs, rather than attempting to fight them.   

Historically, workouts and bankruptcy served different purposes. Traditional workouts depended on unanimity, cooperation, and pro rata sacrifice among creditors. Holdouts could derail negotiations. Chapter 11 solved these collective action problems by supplying a statutory process that could bind dissenters and preserve going-concern value. LMEs changed the equation. Using flexibility in modern debt documentation, distressed borrowers and their sponsors orchestrated restructurings outside bankruptcy while subordinating or disadvantaging non-participating creditors. In effect, they created a private substitute for many of Chapter 11’s coercive features. 

The rise of LMEs is closely tied to broader changes in corporate finance. Large, distressed borrowers are now frequently private equity-backed portfolio companies rather than traditional public corporations. These sponsors often control management, possess deep resources, and are willing to pursue aggressive transactions that public company boards once might have avoided. At the same time, lenders have become more fragmented. Bank lending has given way to syndicated loans held by dispersed investors with differing incentives, trading strategies, and investment horizons. These fractured creditor groups are vulnerable to divide-and-conquer tactics. Sponsors can exploit collective action problems by offering favored treatment to a subset of lenders, encouraging defections from any unified creditor front. 

The first generation of LMEs reflected this dynamic. Transactions were often winner-take-all: a select group of participating lenders received priming debt, enhanced collateral, or discount capture, while excluded lenders were left subordinated with their only alternative being to challenge the transaction in court. These deals produced enormous deadweight costs. But the market adapted. Creditors increasingly organized through cooperation agreements, or ‘co-ops’, that coordinated lenders around a preferred restructuring path and reduced the incentives for internecine battles. LMEs are now generally more inclusive than their predecessors—but they remain unequal. Broad participation is common, yet the largest or most pivotal lenders frequently receive better economics in exchange for organizing the group, giving up the option to pursue a more exclusive deal, accepting trading restrictions, and supplying new money. The result is a second-generation LME model: inclusive, but unequal. 

That same structure now appears in Chapter 11. Restructuring support agreements (RSAs) perform a role similar to co-ops. They lock in support from key constituencies, reduce costly litigation, and create a predictable case trajectory. Critics often attack RSAs as devices that sidestep bankruptcy’s protections of horizontal and vertical equity by rewarding favored parties with special fees, debtor-in-possession (DIP) participation, or access to lucrative exit financing. Those concerns are real. But the LME experience shows that coordinated restructurings do not emerge spontaneously. They require compensation for the creditors whose participation is necessary to make the deal work. Eliminating RSA compensation entirely would risk importing the destructive creditor warfare of early LMEs into Chapter 11. The better solution is not prohibition, but market-testing. If the benefits conferred on RSA signatories are exposed to genuine competition, courts can preserve the coordination benefits of RSAs while policing value diversion. 

The article also uses LMEs to rethink DIP financing. Scholars and practitioners have long recognized that DIP markets often lack meaningful competition. Incumbent secured lenders enjoy structural advantages: they control collateral, possess inside information, and can use milestones, roll-ups, and restrictive covenants to cement case control. Yet outside bankruptcy, those same lenders face regular competition in LMEs from private credit funds offering ‘deal-away’ financing proposals. Even when incumbents ultimately provide the financing, the presence of a credible outsider can materially improve pricing and terms for the borrower. 

Why does that competition disappear in Chapter 11? The answer is not a lack of willing lenders. It is a process problem. Bankruptcy timelines are compressed, debtors have little incentive to cultivate rival offers, and doctrines such as adequate protection can be interpreted in ways that entrench incumbent lenders. The article proposes two reforms. First, when an incumbent lender seeks to prime its own prepetition lien, courts should treat that self-priming proposal as the baseline for adequate protection. If a third-party lender offers better economic terms that reduce the amount or cost of priming debt, the incumbent’s collateral position is improved rather than harmed. Second, third-party lenders whose participation materially improves financing outcomes should receive administrative expense claims for their efforts. In LMEs, outside lenders are often compensated stalking horses; Chapter 11 should similarly reward parties who generate competitive value for the estate. 

The broader lesson is that corporate restructuring has entered a contractarian age, but bankruptcy remains indispensable. Courts need not choose between market solutions and statutory protections. Instead, they should focus on supervising the process rather than dictating outcomes. LMEs reveal that competition and coordination can coexist—but only if legal rules channel them productively. 

The author’s paper is available at SSRN.

Robert Miller is an Associate Professor of Law at the Knudson School of Law, University of South Dakota.