Why Liability Management Transactions Took Over

Introduction

Until roughly 2016, distressed borrowers had a relatively limited out-of-court toolkit:

Each of these tools required either consent from the affected creditors (which holdouts could withhold) or the discharge mechanisms of Chapter 11. Then J.Crew transferred its trademarks to an unrestricted subsidiary in 2016 and used those trademarks to secure new debt outside the existing lender group. The transaction unlocked roughly $300 million of incremental liquidity for the borrower, primed the existing first-lien lenders without their consent, and inaugurated the modern liability management transaction era.

Over the following nine years, LMTs grew from a J.Crew-style outlier into the dominant out-of-court restructuring tool for cov-lite leveraged credits. CreditSights, which tracks LMT volume quarterly, recorded a sharp acceleration in 2024: the firm counted 9 LMTs in Q3 2024 and 19 in Q4 2024, with 2024 representing a new high-water mark for US LMT activity since 2020. Distressed exchanges (a category that overlaps significantly with LMTs in modern usage) accounted for 54% of US high-yield defaults in 2024 per S&P, up from 45% in 2023, and 52% through August 2025. In Europe, LMEs made up roughly 68% of the 90 defaulted issuers Fitch tracked in 2024, up from 57% of 69 issuers in 2023. Almost every US broadly syndicated CLO manager had some LME exposure during 2024.

This article opens the LMT section by walking through the structural conditions that produced the LMT era, the documentation evolution that created the basket capacity LMTs exploit, the four main LMT structures (uptier exchange, drop-down financing, double-dip, hybrid), the role of sponsors and private credit funds in the modern playbook, the post-Serta regulatory environment that reset the rules in late 2024, and the economic and reputational dynamics that have produced the "creditor-on-creditor violence" framing that increasingly governs how lenders evaluate cov-lite credits.

A liability management transaction is a non-pro-rata restructuring in which a distressed borrower works with a majority coalition of its existing creditors to alter the priority structure of the capital stack, the location of collateral, or both, without obtaining unanimous consent from non-participating creditors. The transactions exploit specific provisions in cov-lite credit agreements: unrestricted subsidiary baskets that allow asset transfers outside the credit group, available amount baskets that fund new investments, incremental facility capacity that authorizes additional debt issuance, and required-lender consent thresholds (typically 50.1%) that bind the entire lender group on amendments.

Liability Management Transaction (LMT)

A non-pro-rata transaction in which a distressed borrower works with a majority creditor coalition to issue new debt that primes existing debt held by non-participating creditors, transfer assets outside the credit group to support new financing, or otherwise alter the priority structure of the capital stack without obtaining unanimous lender consent. The principal LMT structures are uptier exchanges (where new senior-secured debt primes existing first-lien debt held by excluded creditors), drop-down financings (where collateral is moved outside the credit group via unrestricted subsidiaries, originating with the J.Crew transaction in 2016), and double-dips (where a financing subsidiary issues new debt with both a direct claim and a guaranteed indirect claim against the parent's collateral). LMTs became the dominant out-of-court restructuring tool from 2020 through 2025, with distressed exchanges (a category overlapping significantly with LMTs) accounting for 54% of US high-yield defaults in 2024 per S&P.

The defining feature is the non-pro-rata aspect. In a traditional out-of-court restructuring, every affected creditor in a class is offered the same terms; participation is voluntary, but the offer is symmetric. In an LMT, the participating creditor coalition gets meaningfully better treatment than the non-participating creditors: priming senior position, new collateral, better economic terms, sometimes new equity. The non-participating creditors keep their original instruments but with subordinated position, depleted collateral, or stripped covenants. The asymmetric outcome is the source of the "creditor-on-creditor violence" terminology.

LMTs did not exist as a meaningful category before roughly 2016, then climbed steadily to dominate the out-of-court playbook by 2024. Three structural conditions converged to produce that arc.

Cov-lite documentation became universal

As covered in the covenant breaches article, covenant-lite share of outstanding US leveraged loans climbed from roughly 15% at end-2008 to 88% by March 2022 and to approximately 89% at year-end 2023 per PitchBook|LCD, with new-issue share running above 90% in 2024-2025. Cov-lite documentation strips out maintenance covenants and relies on incurrence covenants, which means the borrower can sit at any leverage level without triggering a default as long as it does not take a specific affirmative action. More consequentially, cov-lite documentation typically includes generous unrestricted subsidiary baskets, available amount baskets, general investment baskets, and incremental facility capacity. The basket capacity is what LMTs exploit: a borrower with $200 million of unrestricted-sub basket capacity can transfer $200 million of collateral outside the credit group without consent; a borrower with a $300 million incremental facility basket can issue priming new debt without consent. The cov-lite era created the structural runway that LMTs operate on.

The 2020-2025 distress cycle was sustained

The COVID dislocation, the 2022-2023 rate cycle, and the maturity wall pressure of 2024-2026 produced a long period during which a meaningful share of leveraged credits faced refinancing or covenant problems simultaneously. The sustained activity gave LMT mechanics the volume needed to mature into a recognized category with established legal precedents, market conventions, and a specialized advisory ecosystem. Quarterly LMT trackers from CreditSights and similar industry data providers documented the volume growth through the cycle.

Private credit had the appetite to fund non-pro-rata structures

The private credit market expanded from roughly $2 trillion in 2020 to approximately $3 trillion in 2024-2025, and a meaningful share of that capital went into specialty distressed and special situations strategies. Private credit funds with risk appetite for distressed credit and structural creativity to design priming positions became the natural counterparty for the participating-creditor coalitions in modern LMTs. The result is that LMTs are funded predominantly by private credit and special situations investors (Apollo, Oaktree, Centerbridge, Bain Capital Special Situations, Ares, KKR Credit, Sixth Street, Silver Point), not by traditional bank lenders.

LMT activity divides into four structural categories, each with distinct mechanics and use cases.

Each structure is covered in detail in subsequent articles in this section. The uptier exchange mechanic is explained in the uptier exchanges article; the drop-down structure that originated with J.Crew is in the drop-down financings article; the double-dip variant is in the double-dip article. Hybrid structures combine elements; the Ardagh 2024 transaction (an unrestricted subsidiary "hunter-gatherer" facility for exchanging new senior secured loans for existing senior and PIK notes) is a recent example of a structure that combined drop-down asset transfers with priming exchange mechanics.

The documentation evolution that has accompanied the LMT era is one of the most consequential dynamics in modern leveraged finance. Each significant LMT structure has prompted a corresponding "blocker" that lenders push for in subsequent credit agreements, and each blocker has prompted sponsor-engineered workarounds in the next round of documentation.

The race between sponsors (engineering basket capacity into new credit agreements) and lenders (negotiating blockers) is ongoing, but Buccola and Nini's data shows the two structures have evolved very differently. Uptier blockers became near-universal almost immediately after Serta (40% pre-2020, 85% by mid-2022), while drop-down blockers barely moved after J.Crew. The interpretation in the academic literature is that lenders accept the optionality drop-down baskets give borrowers (because repledging collateral can also fund consensual rescue financings) but treat priming uptiers as a pure value transfer that has to be shut down contractually.

A defining feature of modern LMTs is the coordination between the sponsor (existing equity owner) and a majority creditor coalition. The sponsor has a financial interest in restructuring the capital stack to preserve its equity position; the participating creditor coalition has the same interest because the LMT typically improves the participating creditors' recovery economics relative to a Chapter 11 alternative; both parties have an interest in completing the transaction quickly to lock in their relative advantages before non-participating creditors can organize defensive responses.

The transactions are typically negotiated through wall-crossings with the sponsor's existing relationships in the private credit market. The sponsor's RX bank identifies the largest 5-10 holders of the impaired tranche, signs confidentiality agreements with them, and negotiates the LMT structure. The participating coalition is finalized before any public solicitation; non-participating creditors typically learn of the transaction only when it is announced or shortly before. The asymmetric information dynamic is one of the most contested aspects of LMT practice, and lender steering committees have increasingly demanded broader creditor outreach as a condition of negotiation, but the speed-and-coalition advantage remains the structural anchor of the LMT playbook.

LMTs have been continuously controversial since the J.Crew transaction. The objections fall into three categories.

Asymmetric outcomes

Non-participating creditors in an LMT typically suffer materially worse recoveries than participating creditors. The original first-lien lenders in Serta saw their recovery position deteriorate substantially when the participating coalition's new priming debt jumped ahead of them. The original lenders in J.Crew lost the most valuable collateral asset (the IP) when it was transferred to the unrestricted subsidiary. The asymmetric outcomes raise the question of whether LMTs are creditor-friendly restructurings or aggressive value extractions by the sponsor and the participating coalition.

Information and coordination dynamics

The wall-cross-and-coalition dynamic concentrates information and decision-making among a small group of holders. Non-participating creditors often learn of the transaction only after it is structurally complete, with limited time and limited information to evaluate their response. The information asymmetry has produced significant litigation (TriMark, Boardriders, Murray Energy, Serta, Wesco/Incora, Mitel, Robertshaw) over the duty of good faith, the implied covenant of good faith and fair dealing, and the specific contractual interpretations that LMTs depend on.

Documentation and contract interpretation

LMTs ultimately depend on specific provisions in the credit agreement (basket capacity, required-lender thresholds, pro-rata sharing rights, "open market purchase" definitions, lien subordination provisions). The litigation has produced inconsistent rulings across courts, with some upholding the contractual interpretations sponsors and majority coalitions have advanced (Wesco/Incora, ultimately) and others rejecting them (Serta in the Fifth Circuit). The result is a body of law that remains in flux, with substantial uncertainty about which structures will hold up and which will be unwound.

The controversy has produced the "creditor-on-creditor violence" framing that has come to define LMT practice. The phrase captures the asymmetric outcome: creditors invested in the same instrument can experience dramatically different economic outcomes depending on whether they are inside or outside the participating coalition.

LMT mandates have produced a specialized advisory market distinct from traditional restructuring practice. On the borrower side, Houlihan Lokey, PJT, Evercore, Lazard, and Moelis lead the RX league tables, with Kirkland & Ellis dominating LMT counsel work alongside Latham & Watkins, Weil, Davis Polk, and Paul Weiss. On the participating-coalition side, Houlihan Lokey leads creditor-side LMT mandates, with Akin Gump, Davis Polk, Stroock, and Milbank as the active counsel firms. Non-participating creditors increasingly retain their own counsel and FA the moment a transaction is announced, often through a pre-organized cooperation agreement.

Fee economics on LMTs are substantial. Bookrunner gross spreads on the new priming debt run 100-200 basis points; lead-RX success fees run $5-25 million; flagship-LMT counsel fees run $10-30 million across the borrower and participating coalition; non-participating creditors incur additional fees for their own advisors. Total fee load on a major LMT typically runs $50-150 million, materially less than a free-fall Chapter 11 but meaningful relative to the impairment the participating coalition extracts.

LMTs are the heaviest out-of-court restructuring tool short of a prepackaged Chapter 11 filing, and they often appear in combination with other tools. A typical comprehensive restructuring on a multi-tranche capital structure might combine an uptier exchange (for the term loan), a distressed exchange offer (for the public bonds), a debt-for-equity swap (for the most impaired class), and rescue financing (for the new money component), all in a single coordinated transaction. The LMT mechanic provides the priority-altering capability that the consent-based DEO and consensual debt-for-equity swap cannot deliver.

LMTs also operate increasingly as bridges to prepackaged Chapter 11 filings. A 2024 study of 38 loan LMTs executed between mid-2017 and August 2024 found that 37% of the companies ultimately filed for bankruptcy, and only 14% of survivors maintained ratings above CCC+. S&P's separate work on distressed exchanges found that 35% produced a repeat default within 48 months. The pattern is consistent: LMTs often postpone rather than resolve distress, with the eventual Chapter 11 case using the prior LMT framework as the prepack template.

The rest of this section walks through the LMT toolkit in detail: uptier exchanges, J.Crew-style drop-downs, double-dips, the consequential court cases (Serta in the Fifth Circuit, plus Mitel, Robertshaw, Wesco/Incora), cooperation agreements, the post-Serta shift toward more consensual structures, and the recovery economics that separate winners from losers. The LMT toolkit is the most consequential expansion of out-of-court restructuring practice in the past decade, and any restructuring banker working in modern leveraged finance has to understand it cold.