Cooperation Agreements: How Creditors Fight Back

Introduction

The LMT era produced a structural problem for creditors that traditional out-of-court restructuring practice had not contemplated: the prisoner's dilemma in which individual creditors face a choice between maintaining solidarity with the broader creditor base (which preserves their pro-rata position but exposes them to being primed if a different coalition forms) and defecting to join a participating coalition organized by the borrower (which gives them senior position but at the cost of subordinating their fellow creditors). The dilemma is structural: regardless of what individual creditors prefer, the rational individual response in many LMT scenarios is to defect, because waiting to see what others do typically means being primed by whoever moves first.

Cooperation agreements are the structural solution. A co-op binds its signatories to act collectively in any LMT or restructuring negotiation, with no-shop clauses preventing individual members from negotiating bilaterally with the borrower, transfer restrictions binding subsequent purchasers to the same commitments, and binding votes that require collective approval before any individual signatory can participate in a transaction. Properly structured co-ops solve the prisoner's dilemma by removing the individual defection option that creates the dynamic in the first place. Co-op popularity exploded in 2024, with more than 10 instances in the first half of 2024 alone of creditor groups organizing under cooperation agreements, and the structures have continued to proliferate through 2025.

This article walks through the prisoner's dilemma that creates the need for co-ops, the standard terms, the formation sequence, the specific LMT structures co-ops actually block, the borrower-side counter-tactics, and the shield-to-sword evolution that has made co-ops in some 2024-2025 deals offensive tools rather than purely defensive ones.

The LMT prisoner's dilemma is straightforward. A leveraged loan tranche has 30 institutional holders; the borrower is distressed; each lender faces a choice between holding pro-rata position with the rest of the group or defecting into a participating coalition that will execute an uptier. If all 30 maintain solidarity, no LMT can occur. If even 16 defect, they form the priming coalition and the 14 holdouts get primed.

From any individual lender's perspective, being inside the coalition beats being outside it. Even if all lenders collectively prefer the cooperative outcome, the individual incentive pushes each toward defection. The first to defect win; holdouts lose. Without a commitment device, defection is rational and LMTs become near-inevitable in distressed credits even when they are not in the lender group's collective interest.

Cooperation Agreement (Co-Op)

A binding contract among creditors of a distressed borrower committing the signatories to act collectively in any LMT, restructuring negotiation, or litigation involving the borrower. Standard co-op terms include a no-shop clause preventing individual members from negotiating bilaterally with the borrower or accepting any restructuring proposal not endorsed by the co-op, transfer restrictions requiring any subsequent purchaser of co-op-covered debt to sign a joinder agreement and become bound by the same commitments, voting commitments requiring members to vote together on any consent solicitation or amendment, and standstill clauses limiting individual enforcement actions during the co-op's term. Co-op terms typically run 18-36 months. The structure solves the LMT prisoner's dilemma by removing the individual defection option, replacing the rational-individual-defects equilibrium with a binding collective-action equilibrium.

A typical cooperation agreement includes several specific provisions designed to bind the signatories to collective action.

The combination of these provisions creates a binding commitment that overrides the individual incentive to defect. A signatory considering bilateral negotiation with the borrower faces breach-of-contract exposure to the other signatories; a signatory considering selling its position into a non-co-op buyer faces transfer restrictions that the buyer must navigate; a signatory considering voting individually on a consent solicitation faces the binding voting commitment.

Many recent co-ops also include an equalization clause that pools any asymmetric LMT recovery and redistributes it across all members on a per-dollar basis:

The clause removes the defection windfall that drives the prisoner's dilemma.

A co-op typically forms in response to a specific distressed credit's emerging vulnerability to LMT activity, with the formation sequence running over four to eight weeks.

A properly structured co-op blocks several specific LMT transactions:

Co-ops navigate two main legal risks. The first is antitrust: a coalition of competing creditors coordinating behavior can in theory raise horizontal-coordination concerns. The Cleary Gottlieb analysis ("Cooperation, Not a Cartel") argued that lender co-ops should generally withstand scrutiny because the conduct is contractual cooperation among creditors of a single borrower, not market-wide price coordination. The Selecta uptier dispute and the Optimum Communications litigation have both raised antitrust attacks on co-ops without producing definitive rulings, but the risk is real enough that co-op counsel structures the agreement to limit information sharing to what is genuinely necessary for the cooperation.

The second is contract enforceability and securities-law disclosure. Transfer restrictions binding subsequent purchasers must be drafted as conditions precedent to any valid transfer. Public-debt co-ops can trigger 13D group filing requirements if signatories collectively hold more than 5% of voting securities, even when the coordination is on debt instruments. Co-ops also typically rely on common-interest privilege to protect steering-group communications, which requires careful structuring and breaks down if any member walks away with shared materials.

A consequential 2024-2025 development is the shift from defensive shield to aggressive sword. Some co-ops now organize the largest 60-70% of holders as a coordinated coalition and then execute an LMT against the 30-40% of holders outside the co-op. The non-coalition holders face exactly the asymmetric outcome the co-op was originally designed to prevent, except the participating coalition is now more coordinated, more legally protected, and more commercially aligned than any borrower-organized coalition could be. Carveout co-ops (with explicit provisions allowing limited participation in a borrower-organized transaction) make this dynamic explicit; the carveout becomes the wedge through which cooperation breaks down. The Pari Passu Newsletter coverage ("From Shield to Sword") documents the pattern across recent deals.

Co-ops succeed when the largest holders organize quickly enough to form a binding majority before the borrower's coalition closes. The four-to-eight-week formation sequence is the operational constraint. They fail when the borrower can find a coalition outside the co-op membership, when newer credit agreements include anti-cooperation language and disqualified-lender lists, or when antitrust attacks like those in Optimum Communications produce enough disruption to fragment the cooperation.

The cooperation agreement is the defensive innovation of the LMT era. Binding commitments, transfer restrictions, and steering-group operation give the creditor side a tool that materially shifts negotiating leverage in distressed-credit situations. The post-Serta era has seen co-ops continue to proliferate, and any restructuring banker advising on or defending against modern LMTs needs the mechanics down cold.