Key points

• Liability management transactions, in which a borrower restructures its debt outside court, often with only some lenders, have prompted a lasting shift in how credit documents are drafted.
• Lenders now routinely seek specific blockers for asset transfers to unrestricted subsidiaries, priming uptier exchanges and layering of new debt at non-guarantor entities.
• Court decisions, including the Fifth Circuit's 2024 ruling in the Serta Simmons matter on what counts as an open market purchase, have shaped the language lenders ask for.
• Borrowers should expect to trade covenant flexibility for pricing and to see cooperation agreements among lenders in stressed credits.
• Precision matters more than breadth: one loophole in a definition can defeat a carefully drafted blocker.

Introduction

When a borrower's capital structure becomes stressed, the choices are an in-court restructuring, an out-of-court amendment that every lender accepts, or a liability management transaction (LMT) in which the borrower and a group of lenders agree terms that other lenders did not choose. Many LMTs complied with the letter of the existing documents while upsetting the expectations of excluded lenders. Litigation followed, and the market has since changed how loan and bond documents are written. This note summarizes the main transaction types, the protections lenders now request and what borrowers and sponsors should anticipate.

The main transaction types

Drop-downs

In a drop-down, valuable assets move to a subsidiary that is not bound by the credit agreement's covenants, often an unrestricted subsidiary, which then raises new debt secured by those assets. Existing lenders are left with a claim on a weaker pool. The pattern is associated with a well-known 2016 retail transaction, and the lender protections drafted in response are still often called J.Crew blockers.

Uptier exchanges

In an uptier, a majority group of lenders amends the agreement to permit new super-priority debt and exchanges its existing loans into it, moving ahead of lenders who were not offered the exchange. Disputes have turned on whether the amendment needed the consent of each affected lender and on the meaning of open market purchase and pro rata sharing provisions.

Double-dips and other structures

A double-dip gives a lender two claims on the same economic value, for example a direct claim on a subsidiary and a guarantee claim on a parent. Related structures include pari passu transactions that dilute collateral and the use of non-guarantor subsidiaries to raise debt that is structurally senior.

Protections appearing in 2026 documents

• Limits on investments in non-guarantors. Caps on the value of assets, including intellectual property, that can leave the credit group, and limits on designating a subsidiary as unrestricted if it owns material assets.
• Priming and uptier blockers. A requirement that each affected lender consent before liens or payment priority are subordinated, or the waterfall altered, so that some lenders are treated worse than others.
• Pro rata sharing and open market purchase language. Definitions that make clear that exchange offers made to some lenders only are not open market purchases and that payments must be shared.
• Sacred rights. Expanded lists of amendments needing every affected lender's consent, including changes to payment priority, collateral release and guarantor release.
• Process protections. Rules requiring that offers to join an amendment or exchange go to all lenders in the class on the same terms.
• Anti-layering and guarantee covenants. Limits on debt at non-guarantor entities and a requirement that material subsidiaries guarantee the facility.

The role of the courts

No single case settles the law, and outcomes depend on the text of each agreement and its governing law, usually New York. In its 2024 Serta Simmons decision, the Fifth Circuit held that a transaction in which a borrower and participating lenders exchanged loans for new super-priority debt was not an open market purchase under the agreement. Other courts have reached different results on different documents. The lesson drafters have taken is to state precisely what is permitted and what is not, rather than rely on a general understanding of a term.

Borrower and sponsor perspective

Borrowers value the flexibility to address distress without a court process, and many LMTs have helped companies avoid bankruptcy. Sponsors negotiating a new facility should expect lenders to resist broad unrestricted-subsidiary capacity and uncapped incremental debt, and to price accordingly. Tight protections do not remove the ability to restructure, but they usually require broad lender consent, which can help a negotiation by bringing every lender to the table.

In distressed situations, lenders increasingly sign cooperation agreements committing them to negotiate as a group and avoid side deals. Borrowers should understand those agreements early, because they change who can offer what to whom.

Practical steps

• Review existing documents for capacity to transfer assets, designate unrestricted subsidiaries and incur priming debt.
• When refinancing, align covenants with current market protections.
• In a stressed credit, map voting thresholds and sacred rights before any approach to lenders.
• Weigh litigation risk: a transaction that is legally available may still be challenged, and that cost belongs in the analysis.

Corvane Ryle's restructuring and banking lawyers, including Naomi Feldspar and Marcus Delacroix-Hale, advise borrowers, sponsors, lenders and ad hoc groups on the design and defense of these transactions.