Skip to content

Article/Intelligence

LME Jargon Buster: Liability Management Blockers in US Credit Agreements Explained

Corporate Finance
Covenant 101
Liability Management
LME
LME JARGON
Share on X (opens in a new window) Share on Facebook (opens in a new window) Share on LinkedIn (opens in a new window)
Legal Analysts: Melissa Kelley, Julian Bulaon

Americas Covenants at Octus keeps liability management exercises, or LMEs, in the spotlight. We draft Covenant 101 primers that explain specific LME blockers and also assess new LME blockers (such as “next-gen” blockers and “omni-blockers”). We deconstruct the latest developments in LMEs (such as the extend-and-exchange LME seen in Better Health), examine key court decisions concerning LMEs (such as Serta) and create frameworks to help lenders assess their non-pro-rata LME risk.

In addition, our “Material Lender Protections” tables in our Leveraged Loans and High-Yield Bonds Covenant Core Analysis help our subscribers assess quickly their LME risks on specific primary and secondary investments. In this Covenants 101 piece, we set out a glossary to help our readers navigate our Material Lender Protections table in our Americas Covenants Leveraged Loans Core Analysis and understand industry jargon. This document is not intended to be a comprehensive drafting guide; the specific protections in each debt document need to be assessed carefully to determine the level of protectiveness.

Material Lender Protection Definitions / Drafting Considerations / Sample Language
Drop-Down LME Protections: Protections against LMEs that move material assets to an unrestricted subsidiary or nonguarantor restricted subsidiary, where they are then monetized through structurally senior debt financing or asset sales.
Restrictions on Material Intellectual Property or Other Asset Leakage to Unsubs (J.Crew) Definition: A provision that restricts leakage of material assets (usually material intellectual property) to unrestricted subsidiaries.Drafting considerations:

• A J.Crew blocker should prohibit: (a) any transfer of material intellectual property or other material assets through any means (restricted payments, investments or otherwise) to unrestricted subsidiaries; and (b) the designation of subsidiaries that own material intellectual property or other material assets as unrestricted subsidiaries.• Common weaknesses in J.Crew blockers include: (a) weakness in definition of “Material Intellectual Property,” “Material Assets,” or similar concept; (b) missing either the designation or transfer prong; (c) the blocker only applies to certain types of transfers (e.g., applies to “Permitted Investments” only, not restricted payments); and (d) the blocker only applies to transfers by the loan parties but not by nonguarantor restricted subsidiaries.

Sample clause: Private company credit agreement

Section 7.20 Designation of Subsidiaries . . . Notwithstanding anything to the contrary, (i) the Borrower and the Restricted Subsidiaries will not be permitted to transfer to an Unrestricted Subsidiary any Material Intellectual Property, (ii) no Restricted Subsidiary that owns or licenses from a third party any Material Intellectual Property can be designated as an Unrestricted Subsidiary and (iii) no Unrestricted Subsidiary shall own or license from a third party any Material Intellectual Property“Material Intellectual Property” means Intellectual Property that is (i) material to the business of Holdings and its Subsidiaries, taken as a whole, and (ii) owned by, or exclusively licensed by a third party to, Holdings or any of its Restricted Subsidiaries.
Further reading:
No Automatic Release of Non-Wholly-Owned Subsidiary Guarantors (Chewy)
Definition: A provision that restricts the automatic release of a subsidiary guarantor that ceases to be a wholly owned subsidiary following a partial transfer of the subsidiary’s equity.
Drafting considerations:
• A Chewy blocker should prohibit automatic releases of nonguarantor subsidiaries using a balanced mix of objective conditions (e.g., based on the transferee’s identity) and subjective conditions (e.g., the purpose of the transaction).• Exceptions to the blocker should at least require the partial equity transfer to be: (a) to a non-affiliated third party; and (b) for a bona fide business purpose other than to obtain release of the guarantee.• Common weaknesses in Chewy blockers include: (a) the provision being predicated only on subjective factors; and (b) the release can still be obtained so long as the release is treated as an investment in a nonguarantor restricted subsidiary and would be permitted by the investment covenant.

9.18 Release of Liens and Guarantees. (a) The Lenders, the Issuing Banks, the Swingline Lender, and the other Secured Parties hereby irrevocably agree that the Liens granted to the Collateral Agent by the Loan Parties on any Collateral shall (1) be automatically released: . . . provided that no Guarantor shall be released from its obligations as a Guarantor solely by virtue of no longer being a Wholly Owned Subsidiary of the Borrower unless the primary purpose of the proposed transaction is not the release of the relevant Guarantee thereof and such sale or disposition of any Guarantor is to an unaffiliated third party. . . 
J.Crew Protection Extends to All Nonguarantor Subsidiaries (Pluralsight)
Definition: An enhanced version of J.Crew protection that restricts leakage of material assets (usually material intellectual property) to any nonguarantor subsidiary, including nonguarantor restricted subsidiaries.Drafting considerations:
• A Pluralsight blocker should prohibit: (a) any transfer of material intellectual property or other material assets through any means (restricted payments, investments or otherwise) by loan parties to nonloan parties (including unsubs and nonguarantor restricted subs); and (b) nonloan parties from owning or exclusively licensing such material assets.• Common weaknesses in Pluralsight blockers are similar to those of J.Crew blockers.
Section 6.12 Certain Covenants . . . (a)(i) The Borrowers shall not, nor permit any of their Subsidiaries to, sell, transfer or otherwise dispose of any Material Property . . . to any person other than (A) in the case of any Material Property owned by any member of the AMC Group, any Loan Party that is a member of the AMC Group or the Muvico Group, or (B) in the case of any Material Property owned by any member of the Muvico Group, any Loan Party that is a member of the Muvico Group, in each case, other than the grant of a non-exclusive license of intellectual property on arm’s length (i.e. market) terms and economics to any Subsidiary in the ordinary course of business for a bona fide business purpose, (ii) no non-Loan Party shall own or hold an exclusive license to any Material Property “Material Property” means assets, including intellectual property, (A) owned by the AMC Group that is material to the business, operations, assets, or financial condition of AMC Group, taken as a whole, or (B) owned by Muvico Group that is material to the business, operations, assets, or financial condition of Muvico Group, taken as a whole…
Restrictions on Investment Basket Usage for Unsub Transfers (Envision)
Definition: A provision that expressly caps the amount of investment capacity that can be used to transfer assets to unrestricted subsidiaries, for example, by limiting unsub transfers to specific investment baskets or by imposing an aggregate cap on all unsub investments.Drafting considerations:
• An Envision blocker should apply to transfers through any means (restricted payments, investments or otherwise).• A weakness sometimes seen in Envision blockers is when the blocker does not apply to all transfers (e.g., applies to “Permitted Investments” and not restricted payments).
Section 6.03 Investments, Loans and Advances … Notwithstanding anything herein to the contrary, Investments in Unrestricted Subsidiaries shall only be permitted pursuant to Section 6.03(q).(q) Investments in Unrestricted Subsidiaries in an aggregate amount (together (without duplication) with all Investments outstanding under Section 6.03(u) and Section 6.03(bb)) not to exceed the greater of $25,000,000 and 6.0% of LQA Revenue for the most recently ended Test Period at any time outstanding;
Uptier LME Protections: Protections against LMEs that subordinate or strip excluded creditors’ liens or subordinate excluded lenders’ payment priority through an amendment to existing debt documents, usually with the consent of a simple majority or a two-thirds supermajority.
Affected Lender Consent Required for Subordination Amendments (Serta)
Definition: A provision in the sacred rights that requires heightened lender consent (ideally affected lender consent) for amendments that subordinate the debt in right of lien or payment priority. (For the protection that shields lenders’ pro rata sharing and waterfall rights, see our discussion of NYDJ protection below.)Drafting considerations:
• A Serta blocker should prohibit subordination of lien and payment priority to other superpriority debt without affected lender consent. Ideally the blocker would also extend to amendments that “have the effect” of subordinating lien and payment priority (see our discussion of “effect of” language below).• Serta blockers frequently contain exceptions where participation in the priming debt is offered ratably to all lenders on the same terms.• Common weaknesses in Serta blockers include: (a) the blocker does not cover both lien and payment priority; (b) the ratable offer exception is present but does not include the “same terms” requirement; (c) a carve-out for debt “as otherwise permitted in the Credit Agreement” that is not expressly limited to a credit agreement’s terms as of the closing date; (d) the blocker carves out specific types of permitted priming “Indebtedness”; or (e) there is a DIP carve-out that does not provide for ratable participation on the same terms (American Tire loophole).

Section 9.08 Waivers; Amendment. . . . (k) Notwithstanding anything in the foregoing to the contrary, no such agreement shall: (x) effect, directly or indirectly, any waiver, amendment or modification that contractually subordinates, or has the effect of subordinating, (1) the Liens on any Collateral securing the Loan Obligations (other than Loan Obligations secured only by Junior Liens) or (2) the Loan Obligations in right of payment to any other Indebtedness except, in each case, with respect to this clause (x), pursuant to (A) a transaction consented to by each of the Super Majority Lenders and the Super Majority Super-Priority Lenders in which participation in such other Indebtedness is offered, on the same terms (including all economics, other than bona fide cash backstop fees (which may be in the form of original issue discount)) offered to all other providers (or their Affiliates) of such Indebtedness, to the Lenders on a pro rata basis (determined based on the aggregate outstanding principal amount of Loans and Commitments hereunder and the aggregate outstanding principal amount of any other Indebtedness that requires an offer to be made in connection therewith)”
Further reading:
Pro Rata Sharing, Waterfall Provisions Included in Sacred Rights (NYDJ)  Definition: A provision in the sacred rights that requires heightened lender consent (ideally affected lender consent) for amendments that modify the pro rata sharing or waterfall provisions.Drafting considerations:

• A NYDJ blocker should prohibit amendments to: (a) the pro rata sharing provision; and (b) both the order of payments and the pro rata sharing of payments in the post-event of default waterfall provision, in each case without affected lender consent.• Common weaknesses in NYDJ blockers include: (a) not protecting both the pro rata sharing and waterfall provisions; (b) not protecting amendments to the waterfall’s order of priorities; and (c) carve-outs to the pro rata sharing obligation for refinancing amendments, amend-and-extend provisions, and incremental equivalent debt, which can be abused when broadly drafted.

Sample clause: MillerKnoll April 2025 Credit Agreement

Section 9.08 Waivers; Amendments  . . .  provided, however, that no such agreement shall:  . . . (iv) amend the provisions of (x) Section 2.18(b), in a manner that would by its terms alter the payment waterfall or (y) Section 2.18 (c), in a manner that would by its terms alter the pro rata sharing of payments required thereby, in either case, without the prior written consent of each Lender adversely affected thereby…

Further reading: The Next Episode: Understanding Non-Pro-Rata LME Risk After Serta, Better Health and Oregon Tool
Double-Dip / Pari-Plus Protections: Protections against LMEs that use an intercompany loan from a nonguarantor to establish a pari secured claim at the existing credit group, which is then duplicated with guarantees at the same credit box (in a double-dip), supplemented with guarantees on other assets outside the credit group (in a pari-plus) or both (in a double-dip plus).
All Intercompany Debt to Nonguarantor Subs Must Be Subordinated (At Home) Definition: A provision requiring that any intercompany debt incurred under any debt basket that is owed by a loan party to a nonloan party subsidiary be subordinated to the loans. This provision is often found at the end of the debt covenant.Drafting considerations:

• An At Home blocker should require that all intercompany debt incurred by a loan party and owed to a nonloan party (such as an unrestricted subsidiary, nonguarantor restricted subsidiary or nonrestricted affiliate) under any basket be subordinated to the credit facilities.• This should not be confused with a restriction that applies only to the intercompany basket.

Sample clause: AMC July 2024 Credit Agreement

Section 6.01 Indebtedness; Certain Equity Securities … (b) All Indebtedness owed by a Loan Party to a Subsidiary of AMC that is not a Loan Party (or any Guarantee by a Loan Party of Indebtedness owed to a Subsidiary of AMC that is not a Loan Party) shall be unsecured and subordinated to the Loan Document Obligations. All Indebtedness owed by a member of the Muvico Group to a member of the AMC Group (or any Guarantee by a member of the Muvico Group of Indebtedness owed to a member of the AMC Group) shall be unsecured and subordinated to the Loan Document Obligations.

Further reading: Won’t Get Fooled Again: How Post-LME Documents Are Setting the Standard for the Next Generation of Lender Protections
Continuing Restrictions Against Unsubs Holding Debt of the Restricted Group Definition: A provision that prohibits unrestricted subsidiaries from holding at any time debt or liens that are recourse to the restricted group. This provision often is found in the unrestricted subsidiary definition and/or the unrestricted subsidiary designation provisions.Drafting considerations:

• A blocker should prohibit unsubs from holding debt that is recourse to the restricted group both at the time of their designation and at any point thereafter.• An inherent weakness of this form of double-dip protection is that it only mitigates double-dip risk at an unsub and not a nonloan party.

Sample clause: Mallinckrodt November 2023 Credit Agreement

“Unrestricted Subsidiary” shall mean  . . .  provided, that a Borrower shall only be permitted to so designate an Unrestricted Subsidiary after the Closing Date so long as . . . (b) such Subsidiary and its subsidiaries . . . (ii) do not at the time of designation (and at all times thereafter) own Equity Interests or Indebtedness of, or have Liens over any assets of, the Parent or any Subsidiary (other than subsidiaries of the Subsidiary to be so designated). . .

Further reading: Won’t Get Fooled Again: How Post-LME Documents Are Setting the Standard for the Next Generation of Lender Protections
General LME Protections
Express Restrictions on Non-Pro-Rata Purchases, Exchanges These conditions or other restrictions limit the assignment provisions from being used to effectuate a non-pro-rata LME exchange (such as a requirement that an assignment to the borrower be made for cash consideration).Sample clause: RackSpace March 2024 Credit Agreement

Section 9.04    Successors and Assigns. . . (i) Notwithstanding anything to the contrary in this Agreement, including Section 2.18(c) (which provisions shall not be applicable to clauses (i) or (j) of this Section 9.04), any of Holdings or its Subsidiaries, including the Borrower, may purchase by way of assignment and become an Assignee with respect to Term Loans at any time and from time to time from Lenders in accordance with Section 9.04(b) hereof (each, a “Permitted Loan Purchase”); provided, that, in respect of any Permitted Loan Purchase, . . .  (E) other than in respect of a transaction otherwise permitted pursuant to Section 2.21(e) through (p), the consideration paid by Holdings or its Subsidiaries in connection with such Permitted Loan Purchase shall consist of cash.

Further reading: Won’t Get Fooled Again: How Post-LME Documents Are Setting the Standard for the Next Generation of Lender Protections
Restrictions on Issuing New Debt to Influence Voting (Wesco/Incora) Definition: A provision (ideally in the sacred rights) that restricts the company from manipulating voting thresholds, including by issuing additional voting debt.Drafting considerations:

• A Wesco/Incora blocker should restrict the company from incurring or authorizing the incurrence of additional debt for the primary purpose of influencing voting thresholds. Alternatively, the agreement may disenfranchise any debt issued concurrently with the seeking of any amendment, consent or waiver. The blocker must be included in the sacred rights, to prevent majority creditors from removing it.• In addition, it may be helpful to expand a Wesco/Incora blocker to actions that “have the effect” of influencing voting thresholds (see next row).• Potential issues with Wesco/Incora blockers include: (a) not including the blocker as a sacred right; and (b) only including the blocker as a sacred right (i.e., only prohibiting amendments that authorize vote-rigging debt, but not prohibiting the incurrence of such debt without an amendment, as happened in Robertshaw).

Sample clause: RackSpace March 2024 Credit Agreement

Section 9.08 Waivers; Amendment . . . (l) Notwithstanding anything herein to the contrary, for purposes of determining whether Required Lenders, Required Super-Priority Lenders, Super Majority Lenders or Super Majority Super-Priority Lenders, as applicable have provided any consent (or decision not to consent) to any amendment, modification, waiver, consent or other action with respect to any of the terms of any Loan Document, Incremental Loans and Incremental Commitments incurred on the date, or substantially concurrently with the date, of such consent will be disregarded for purposes of determining whether Required Lenders, Super Majority Lenders or Super Majority Super-Priority Lenders, as applicable have provided or not provided such consent on the date of the incurrence of such Incremental Loans or Incremental Commitments to the extent (x) such Incremental Loans or Incremental Commitments were provided by an Affiliate of the Borrower, (y) such transaction was not for a bona fide business purpose (as determined in good faith by this independent members of the Borrower’s Board of Directors) or (z) such Indebtedness is incurred for the primary purpose of influencing voting thresholds under the Loan Documents; provided that, this clause (I) may not be amended, modified or waived without the prior written consent of each Lender.

Further reading: Won’t Get Fooled Again: How Post-LME Documents Are Setting the Standard for the Next Generation of Lender Protections
‘Effect of’ Language Included in Sacred Rights This is not a blocker, per se, but extending sacred rights to amendments that have the “effect of” may block transactions that go beyond formal amendments to the sacred rights provisions. Judge Marvin Isgur in Wesco/Incora relied on this language to void an uptier exchange. “Effect of” language can apply to all sacred rights, or only to specific sacred rights.Sample global language: Private company credit agreement

10.05 Amendments and Waivers. . . . (b) Affected Lenders’ Consent. Without the written consent of each Lender that would be directly and adversely affected thereby (but not the Requisite Lender consent required by 10.5(a) other than with respect to clauses (viii) and (ix)), no amendment, modification, termination, or consent shall be effective if the effect thereof would . . . 

Sample language limited to a specific sacred right: Wesco/Incora 2026 Notes (subject to lien stripping)

Section 9.02 With Consent of Holder of 2026 Secured Notes. . . . In addition, without the consent of the Holders of at least 662 “3% in aggregate principal amount of the 2026 Secured Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, the 2026 Secured Notes), no amendment, supplement or waiver may (1) have the effect of releasing all or substantially all of the Collateral from the Liens created pursuant to the Security Documents (except as permitted by the terms of this Indenture, the Security Documents or the Intercreditor Agreements) or changing or altering the priority of the security interests of the Holders of the 2026 Secured Notes in the Collateral under the ABL Intercreditor Agreement or the Pari Passu Intercreditor Agreement, (2) make any change in the Security Documents, the Intercreditor Agreements or the provisions in this Indenture dealing with the application of proceeds of the Collateral that would adversely affect the Holders of the 2026 Secured Notes or (3) modify the Security Documents or the provisions of this Indenture dealing with Collateral in any manner adverse to the Holders of the 2026 Secured Notes in any material respect other than in accordance with the terms of this Indenture, the Security Documents or the Intercreditor Agreements.

Further reading:
Non-Serta/NYDJ Blockers Included in Sacred Rights In credit agreements, it is common for Serta and NYDJ blockers to be included as sacred rights. Sometimes (usually in post-LME credit agreements), other LME blockers also are included as sacred rights. This gives lenders additional protection, because only affected lender consent can remove the blockers.Sample clause (J.Crew-style protection embedded in sacred rights): AMC July 2024 Credit Agreement

Section 9.02  Waivers; Amendments. . . . (b) . . . provided that no such agreement shall . . . (xi) amend, modify or waive any provision of the Loan Documents in a manner that would permit any Subsidiary to be designated as an “Unrestricted Subsidiary” or permit the transfer of any assets (including by Disposition, Investment or Restricted Payments) to “Unrestricted Subsidiaries” or otherwise permit the creation or existence of, or transfer of any assets (including by Disposition, Investment or Restricted Payments) to, a Subsidiary otherwise not subject to the provisions of the Credit Documents (it being acknowledged that no Subsidiary is an “Unrestricted Subsidiary” hereunder as of the Effective Date) without the written consent of each Lender;
Protections Against Using a Credit Agreement’s Amend-and-Extend Provisions to Carry Out a Non-Pro-Rata LME Exchange (Better Health) Definition / Drafting considerations: This provision, which may be referred to as a “Better Health blocker,” should: (a) require that any loans made under a credit agreement’s extension provisions be made on a pro rata basis; and (b) protect that pro rata extension offer requirement as a sacred right.Sample clause: Private company credit agreement

(o) amend, waive or otherwise modify the Pro Rata Extension Requirement, Section 2.12(a), Section 2.13, Section 8.04 or any other provision of the Loan Documents setting forth the order of application of payments (including any voluntary or mandatory prepayments or Dutch Auctions) or providing for the pro rata application of payments, in each case, without the prior written consent of each Lender; provided that, such provision may be amended or modified to solely to the extent necessary to implement any Indebtedness that is incurred pursuant to an amendment or modification to the Loan Documents that is approved by the Lenders specified in clauses (k) or (l) above;Notwithstanding anything to the contrary in this Section 2.19, (I) any Extended Tranche shall have the same payment priority as, or a more junior payment priority than, the Specified Existing Tranche (including with respect to Sections 2.05 and 8.04) and (II) the Borrower shall offer the Extension Request to the Specified Existing Tranche lenders on a pro rata basis (this clause II, the “Pro Rata Extension Requirement”).

Further reading:
Anti-LME Covenant  (‘Omni-Blocker’) Definition: A blocker that seeks to prevent all types of LMEs.Drafting considerations: An omni-blocker should protect against the end (a non-pro-rata LME) as well as the means (being the known routes to an LME). This helps to protect against known and unknown forms of LMEs.Sample clause: Getty Images February 2025 Credit Agreement

Section 7.17 Priming Financing/Liability Management Transaction. The Parent Borrower shall not, nor shall it permit any Restricted Subsidiary to, enter into or effect any Priming Financing/Liability Management Transaction.“Priming Financing/Liability Management Transaction” means any exchange (or any similar transaction specifically designed to circumvent the restriction set forth in Section 7.17 but contemporaneously achieve the same effect as an exchange) of any Term Loans with any other Debt Issuance of the Parent Borrower or any of its Subsidiaries (the “New LMT Debt”) in a transaction that is not for a bona fide business purpose and instead is specifically designed to “uptier” holders of the Term Loans on a non-pro rata basis into New LMT Debt that is contractually or structurally senior relative to the then existing Term Loans. For the avoidance of doubt, none of the following shall constitute a Priming Financing/Liability Management Transaction:(1) any Indebtedness incurred to finance an acquisition secured by the acquired assets and/or guaranteed by an acquired entity, so along as such Indebtedness and the acquisition are permitted under this Agreement and any acquired assets that constitute Collateral are pledged to the Collateral Agent, for the benefit of the Secured Parties, and any acquired entity that is or becomes a Restricted Subsidiary complies with Section 6.12 to the extent required (and within the periods required) by this Agreement;

(2) any Indebtedness that is contractually or structurally senior to the Liens securing the Obligations prior to the announcement of such Priming Financing/Liability Management Transaction; and

(3) any Permitted Refinancing of Indebtedness permitted to be incurred under this Agreement.

Further reading:

This publication has been prepared by Octus, Inc. or one of its affiliates (collectively, "Octus") and is being provided to the recipient in connection with a subscription to one or more Octus products. Recipient’s use of the Octus platform is subject to Octus Terms of Use or the user agreement pursuant to which the recipient has access to the platform (the “Applicable Terms”). The recipient of this publication may not redistribute or republish any portion of the information contained herein other than with Octus express written consent or in accordance with the Applicable Terms. The information in this publication is for general informational purposes only and should not be construed as legal, investment, accounting or other professional advice on any subject matter or as a substitute for such advice. The recipient of this publication must comply with all applicable laws, including laws regarding the purchase and sale of securities. Octus obtains information from a wide variety of sources, which it believes to be reliable, but Octus does not make any representation, warranty, or certification as to the materiality or public availability of the information in this publication or that such information is accurate, complete, comprehensive or fit for a particular purpose. Recipients must make their own decisions about investment strategies or securities mentioned in this publication. Octus and its officers, directors, partners and employees expressly disclaim all liability relating to or arising from actions taken or not taken based on any or all of the information contained in this publication. © 2025 Octus. All rights reserved. Octus(TM) and the Octus logo are trademarks of Octus Intelligence, Inc.