As liability management exercises, or LMEs, have increased against a backdrop of over a decade of weakening covenant terms, one of the defensive tools creditors have in their armory to forestall potential lender-on-lender conflicts in consensual LMEs is the “cooperation agreement.”
Cooperation / coordination agreements are used by lenders ahead of a restructuring to coordinate actions of the participating lenders and present a unified front in negotiations with the borrower, thereby strengthening their collective bargaining power. See HERE for our Covenants 101 explaining cooperation agreements and anti-cooperation provisions.
For many investors, any restriction on their ability to coordinate with other creditors as part of any restructuring negotiations remains a redline item. As borrowers and sponsors seek maximum flexibility when negotiating covenant terms, attempts have been made to introduce anti-cooperation provisions as a means of controlling lender voting on restructuring discussions. Octus has tracked three successful anti-cooperation provisions that cleared the market in 2025, out of 13 attempts in the United States:
- Warner Bros. Discovery in its investment-grade bonds;
- Getty Images via an exit consent; and
- Optimum Communications in a bespoke drop-down transaction that was not widely syndicated.
In the European broadly syndicated loan market, or BSL market, sponsors and their advisors continue to attempt to introduce anti-cooperation provisions either in pre-marketing or at syndication, but to date none have cleared the market due to rigorous and successful investor pushback. This hardline stance by investors may have prompted some sponsors and their advisors to get more creative in their attempts to push through anti-cooperation language. As we highlighted in our third-quarter 2026 leverage loan wrap for the European leveraged loans market, in a recent deal the definition of “sub-participations” was expanded in a way that (arguably) could have the effect of an anti-cooperation agreement. This article explains the expanded definition and its implications.
- Given investors’ sensitivity to maintaining their last lines of defense in limiting lender-on-lender violence in LME negotiations, a provision that seeks to constrain lenders’ right to coordinate deserves upfront disclosure, rather than being shoehorned into a standard boilerplate definition. This is especially where the aim is to effect a fundamental change to a well understood market practice. A properly disclosed anti-cooperation / coordination provision, especially in the pre-marketing or marketing term sheet stage, allows parties to have robust discussions on the sponsor’s request and for investors to factor that into their investment decision.
- The expansion of what constitutes a “sub-participation” and recent attempts to mitigate the impact of such language introduce ambiguity and interpretation risks.
Sub-participation provisions allow a lender of record to enter into an arrangement with a counterparty (the sub-participant) to pass on the economic risk of its loans without a concurrent transfer of its legal rights and obligations. The sub-participant has no contractual relationship with the borrower, instead the lender of record agrees to turn over amounts received from the borrower on the sub-participated loans to the sub-participant.
A sub-participation may be a non-voting arrangement, where the lender of record is not required to consult with the sub-participant on how it votes the sub-participated loans. Alternatively, a sub-participation arrangement may grant the sub-participant specific voting rights, which (where applicable) are typically limited to voting on adverse changes to money terms or other matters that require unanimity. In such instances, the lender of record would agree to consult with the sub-participant on how to vote when it is required to do so.
Provisions regulating sub-participation arrangements are typically included in the transfer provisions of credit agreements, making voting sub-participation or equivalent arrangements subject to the same restrictions and exceptions that apply to any transfer or assignment of the loans or commitments. The credit agreement may also include additional conditions specific to sub-participation arrangements.
A voting sub-participation will be permitted under the credit agreement, subject to consent of the borrower, unless the sub-participant or the sub-participation falls under any exceptions to the consent requirement.
Non-voting sub-participation arrangements are generally excluded from the restrictions that apply to voting sub-participations.
Most definitions of “sub-participations” in credit agreements are aimed at controlling the universe of transactions by which a lender of record sells its “economic” interests, or that has a similar economic effect (whether voting or non-voting). However, a few recent deals in the European BSL market have introduced additional wording into the “sub-participations” definition that extend the range of transactions beyond sub-participation arrangements, by potentially controlling any agreement under which a lender of record agrees to consult with any counterparty on exercising its voting rights, with no regard for the economic effect.
The definition of “sub-participations” as extracted in Example 1 of the Appendix (see below), expanded the types of transactions that would be “deemed” a sub-participation to include “… and/or any other agreement or arrangement which transfers, assigns, grants or bestows (or purports to transfer, assign, grant or bestow) any voting, consent or similar right of a Lender under, or in relation to, the Facilities and/or Finance Documents to a counterparty (including any agreement or understanding pursuant to which such Lender is required to, or will, consult with any other person in relation to the exercise of such rights and/or obligations)…” The insertion of the “consultation” language is the basis of the potential anti-cooperation effect.
A potential interpretation of the wording (if it holds, although it is ambiguous) is that any lender that enters into a cooperation agreement with other creditors of the borrower would be required to comply with the transfers and assignments provisions regulating sub-participations as they relate to notification and / or consent or requirements.
If the sub-participation does not fall within any exception to the borrower consent requirement, then lenders wishing to participate in a cooperation agreement will be required to seek consent of the borrower, shifting the balance of power to the borrower. This becomes more acute in credit agreements that do not require the borrower to be reasonable in considering transfer requests or do not have a deemed consent period. Furthermore, where a sub-participant or sub-participation comes within an exception to the consent requirement, there may be a prior notice requirement, as is becoming common in credit agreements. While prior notification is less restrictive, it can act as a dampener for investors who may not want their participation in the cooperation agreement disclosed to the borrower.
It is noteworthy that some credit agreements extend the consent requirements to inter-tranche transfers, assignments or sub-participations, such that any transfer, assignments or sub-participation to an existing lender, its affiliates or funds in a different tranche to that of the transferring lender / affiliate / fund, also requires consent. Where the “anti-cooperation” language is present, the implication is that a cooperation / consultation arrangement among lenders in the same facility tranche would be deemed “sub-participation” that would not require consent of the borrower, although (if applicable) they may be required to notify the borrower of the arrangement. Where the cooperation agreement is with lenders in other facility tranches within the credit agreement or with other creditors across the group’s capital structure, each lender will be deemed to have entered into a “sub-participation” and will require borrower’s consent to enter into such agreement.
If a lender who enters into a cooperation agreement fails to notify or obtain the borrower’s consent (as applicable), such lender will become a “transfer defaulting lender,” with consequences including disenfranchisement, exclusion from receiving financial information and being “yanked”.
A few recent deals have added new wording in an attempt to address the potential application of the expanded sub-participations definition to cooperation agreements – see language underlined in blue in Example 2 of the Appendix. It is unlikely that such language is sufficient to address the ambiguity introduced by broadening the scope of agreements or arrangements that would constitute a “sub-participation” in the first instance. The definition in Example 2 still covers any arrangement where consultation with another party is required. If the aim of the additional wording was to limit it to transactions in which only economic interests are transferred (or transactions having a similar effect), then the definition should be simplified to remove all the underlined wording in the definition. The transfer provisions, including consent requirements, are sufficient to control voting participations.
As mentioned above, credit agreements take different approaches in dealing with voting and non-voting sub-participations. Some credit agreements are silent on the point, in which case the sub-participation agreements are subject to the same conditions that apply to transfers or assignments.
Some credit agreements have an additional clause dedicated to sub-participations, specifying conditions that would apply (although such conditions will not create contractual privity between the borrower and any sub-participant). One common condition is that the lender retains exclusive voting rights, with no agreement, arrangement or understanding under which it is required to or will consult with any other person on the exercise of its rights and obligations under the credit agreement. If that condition or other conditions attached to sub-participations are not complied with, then the transfer conditions will apply. The inclusion of “consultation” language in that instance simply has the effect of subjecting the sub-participation arrangement to the transfer conditions but would not be read as covering cooperation agreements.
On the other hand, some credit agreements include an overriding provision that prohibits any voting sub-participation without the borrower’s consent, at its sole discretion (which would exclude such sub-participations from the reasonableness requirement that otherwise applies to transfers and assignments). Failure to obtain such consent will render the sub-participation void and unenforceable.
Examples sub-participation definition with anti-cooperation effect:
Example 1:
Example 2:
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