2026 Distressed Outlook: Heated Debtor-Creditor Rivalry, More Change-of-Control Restructuring Due to Failed LMEs, Private Credit Workouts

Reporting: Harvard Zhang

The year of 2026 is shaping up to be a tale of two themes: aggressive liability management exercise tactics, and a larger volume of owners tossing the keys to creditors or distressed sales.

“What Altice USA (co-op litigation, deal away) and KIK Consumer Products (deal away) did at the end of 2025 may be canaries in the coal mine with sponsors and companies and their advisors getting very aggressive in 2026,” according to Scott Greenberg, a partner at Gibson Dunn and global chair of the firm’s business restructuring and reorganization practice. “Lenders are going to need to be more aggressive as well by pursuing litigation among other options to match the sponsor/company playbook. Both sides of the house are likely going to get more dug in.”

“An important context for 2026 is one trillion of speculative debt maturities in 2028 that companies, sponsors and lenders will start to work through,” said Alex Raskin, a managing director in Houlihan Lokey’s financial restructuring group. “As many LMEs come back for a second-step conversation, there is a lot of focus on prebaking and prewiring a subsequent out-of-court restructuring as part of an LME to save subsequent costs and time. We will see more of this in 2026.”

“We are going to see a lot of handing-over-the-keys transactions resulting from both the expiration of the extended runway created by LMEs as well as private credit workouts,” according to Ronen Bojmel, a senior managing director at Guggenheim Securities. “I expect to see the return of the good old deleveraging transactions in 2026.”

Walk Away Power

Leverage, or perceived leverage, is at the core of balance-sheet negotiations between the company and its creditors, according to Matthew Roose, a partner at Ropes & Gray and co-head of the firm’s business restructuring group. For the deal-away threat to feel real, companies and sponsors are executing them, which can help bring existing creditors to the table, Roose said.

“Some cooperation agreements are driving deal-away activities as the companies think about alternatives to transacting with existing lenders that are part of a co-op, especially where every lender is invited to join,” said Benjamin Arfa, a partner in Wachtell’s restructuring and finance department. “What remains to be seen is whether it is a real return of the deal away, or a layover to unwinding those deals and going back to a deal with existing creditors.”

The use of nonsubsidiary drop-downs and getting around debt and lien limitations, or restrictions such as J. Crew and Chewy blockers in the debt documents, may become more prevalent, especially when the sponsor’s back is up against the wall or there is only a liquidity ask instead of a need to extend maturities or capture discounts, according to Evan Fleck, a partner at Milbank and co-practice group leader and co-head of the firm’s global financial restructuring group.

Importantly, creative dealmakers will always find a way. “LME blockers may not end up blocking LMEs,” Arfa said. “I think we will see deals done this year that will achieve exactly the results that the LM blockers were intended to block.”

Also to the company’s and sponsor’s advantage, DQ lists are getting more prevalent and they do work to some degree, according to Michael O’Hara, a managing director at Jefferies and co-head of the firm’s U.S. debt advisory & restructuring group.

Various industry sectors are expected to experience stress and distress, including tech and AI-affected companies, education, consumer products, healthcare, chemicals, paper and packaging as well as building products, O’Hara said.

Revenge Is Dish Best Served Cold

After co-ops’ proliferation in 2024 and qualitative evolution in 2025, corporate America finally struck back at the lender pact phenomenon. But the litigation is unlikely to stop creditors from signing co-ops, even though caution and drafting tweaks are expected.

“We are getting good and fair questions from clients about potential changes to co-op documentation to make it less susceptible to litigation, but lenders are not panicking or running for the exits” on co-ops, Gibson Dunn’s Greenberg said. “Co-ops are not meant to prevent lenders from looking at a new-money opportunity of the borrower. Rather, the co-op prevents individual lenders from using the new-money opportunity to benefit their existing paper to the detriment of other lenders who are party to the co-op.”

“A co-op should be about protecting creditors’ recoveries on account of their holdings, and the drafting of the agreement should be tied closely to the subject debt that they own and the restructuring of that debt,” Milbank’s Fleck said. “Clients have reached out to make sure the drafting is proper. Overall, the value our clients see in entering into co-ops in the right situations is alive and well.”

LME, A Success

There will be more LME success stories this year that contradict the narrative that LME is just kicking the can before an inevitable restructuring, according to Wachtell’s Arfa. The larger volume of total LM deals is part of it, but giving the company breathing room to execute on its business plan can work, Arfa said. “Companies that were not obvious candidates for LM are also seeing opportunities, and we are going to see more of that in 2026.”

Incorporating M&A in an LME, especially with a pari-plus structure, can be a recipe for success, according to Bruce Mendelsohn, a partner at Perella Weinberg and global head of the firm’s restructuring business and head of its financing and capital solutions group. “Such a structure with the contribution of an acquisition target can create incremental financing capacity, increase the company[’s] and sponsor’s access to capital, and facilitate a transaction with existing creditors for an otherwise over-leveraged cap stack.”

“A deal trend [that is likely] to continue is splitting up a company into a GoodCo or GrowthCo and a legacy RemainCo, executing an M&A transaction for the GoodCo or GrowthCo, and us[ing] the proceeds to ultimately drive a deal at the RemainCo,” Houlihan Lokey’s Raskin said.

If there is a liquidity need, as is often the case, we will see more sidecar facilities funded by existing term lenders that give the lenders better covenants and leverage to control a potential subsequent restructuring, according to Milbank’s Fleck.

Oldie but Goodie

As part of the expected pickup in deleveraging deal volume in 2026, we may see more of the classic, plan-sponsor type restructurings, according to Barak Klein, a managing director at Moelis and co-head of the firm’s U.S. capital structure advisory business.

“Historically investors would come in and buy the debt to own the equity, and that hasn’t happened for a really long time. In some situations after the LME there’s an obvious tranche where the rights offering could come through. We may see more of the buying-the-claim-to-own strategy as many LMEs head to restructuring,” Klein said.

Five and a half years after Serta kicked off the current LME era, some sponsors have sometimes decided to go straight to a restructuring instead of executing an LME first. “This kind of decision has benefits for both the sponsor and the creditors. Typically a consensual deal can be reached. There is less noise and disruption than going through a chapter 11. It is also better for the relationship between the sponsor and the creditors,” according to Ropes & Gray’s Roose.

In some middle-market and private credit workouts, “the cost savings from avoiding a Chapter 11 filing are realized by the lender and also passed on to equity holders, who in turn receive more value than any hold-up value they would receive in a Chapter 11,” according to Ivona Smith, an independent director involved in many situations, including Silvergate, 2U, Vintage Wine Estates, RYAM and the Weinstein Co., among others.

“Typically, liquidity-challenged middle market companies look for unencumbered assets to borrow against to extend their runway as a bridge to an operational turnaround or a sale,” Smith said. “The question is, do they have the skills and resources to execute that turnaround? Many private credit lenders are also unwilling to wait it out and instead push for a sale to a better-positioned owner.”

But more LME may be coming for private credit. “At some point there is going to be a secondary trading mechanism of direct lenders’ positions, and once there is churn in the lender base and the number of lenders increases, there should be similar LME dynamics as in the broadly syndicated universe,” according to Klein.

In the BSL world, restructuring tools other than a chapter 11 filing are getting advisors’ attention. “We have used a Uniform Commercial Code foreclosure process with majority consent to extinguish secured debt and hand over equity quickly and at a much lower cost,” Arfa said.