Davis Polk partner and Restructuring practice co-head Damian Schaible discussed the surge in liability management exercises (LME) as well as the restructuring outlook for this year with Debtwire.

The article notes that LME activity is expected to remain elevated throughout the year as persistently high interest rates, political risk and maturity walls push borrowers to consider restructuring options with creditors and third-party capital providers that allow existing equity investors to preserve their ownership.

“We’ve started to see full restructurings of post-LME companies that hit subsequent road bumps or don’t realize sufficient deleveraging,” Damian explained. “In some of these situations, we are seeing creditors and equity holders come together to effectuate out-of-court changes of control.”

When asked about what is fueling LME activity, Damian said, “There is a very large and active private credit and special situations market that is extremely interested in doing [LME and new money] deals, such as funding into a drop-down vehicle.” He added that private credit funds are increasingly competing with existing lenders of a company to provide capital. Capital from these special situations funds are no longer more expensive than the money coming from the creditors in some situations.

Additionally, the article highlighted that cooperation agreements, which were a major driver in restructuring in 2024, are also expected to shift this year.

“I think cooperation agreements will continue to evolve in 2025,” Damian said, adding that while 100% participation co-ops were once the norm, there are more 50% co-ops in the market now that are intended to secure and preserve a majority group.

“You’re going to continue to see some co-ops that permit non pro-rata treatment among steer co-members and broader ad hoc group members and some co-ops that contemplate variable treatment between initial participants and later-added participants,” Damian noted, adding that the lengths of co-ops are also changing, with co-ops until maturity and even into bankruptcies being preferred by lenders in some situations.

“Creditors set to take control even as LME spree shows no signs of ending – US Restructuring Outlook,” Debtwire (January 31, 2025) 

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