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Testing the Limits: Cooperation Agreements as a Shield Against Liability Management in 2024

Legal Research: Shan Qureshi U.S. Covenants: Julian Bulaon As borrowers of covenant-lite debt, issued during the low-interest-rate environment of 2019-22, become financially distressed, creditors have experienced limited controls over borrowers acting in conjunction with their sponsors to move value away from creditors’ remit. Loose protections mean that borrowers have first-mover advantage when experiencing financial distress, allowing them to execute liability management exercises, or LMEs, which can damage the position of creditors. Some of these LMEs are so impactful that they have been referred to as “creditor-on-creditor violence” and have included “uptiers,” “dropdowns,” “double dips,” “vote rigging” or even coercive exchange transactions, which may benefit certain participating creditors at the expense of other creditors. Where covenant protection is ambiguous or insufficient, creditors can look to put in place “cooperation agreements” to improve their bargaining power against a borrower. In this report, we evaluate the role that cooperation agreements can play in a restructuring negotiation.   Examples of US Cooperation Agreements in 2024 Although cooperation agreements are not novel technology in the United States, their popularity among creditor groups exploded in 2024 in response to the unprecedented surge in liability management activity. In the first half of 2024 alone, Reorg reported on more[...]