The Evolution of the LME: How Did We Get Here and Where Are We Going?

The liability management exercise, once a niche sponsor tactic for buying time, has evolved into Europe’s 2025 defining restructuring flashpoint. Almost every restructuring and insolvency conference in the last 18 months has headlined LME at the risk of boring practitioners into fatigue, though few can afford to tune out.

In an era when English Part 26A case law is eroding faith in once-predictable court outcomes, and litigation over Selecta and Hunkemöller has made “creditor-on-creditor violence” part of the market’s lexicon, the LME now sits at the intersection of creativity and controversy.

Many practitioners have opinions on whether LMEs are positive, negative or an inevitable part of loose documentation – but how did we get here? This article seeks to explain how LME arrived, why it arrived and where it is going.

What began as contractual gymnastics to buy time and hopefully avoid insolvency has matured into a global test of legal boundaries, reputational tolerance and sponsor nerve. Europe has caught up with the U.S. and may now be suffering the same litigious hangover.
 

The story of the LMEs in Europe so far is, in essence, a story of initial ingenuity meeting resistance. Every refinancing is technically an LME, but what we now mean by LME is something more aggressive: a creative use of lending documents to provide liquidity, runway to a debtor, push back maturity or capture price discounts, potentially enhancing one creditor group’s position at another group’s expense. So far, the party only seems to be taking place in bonds, as loans, protected by tighter covenants, smaller creditor groups and higher consent thresholds remain somewhat insulated from LME.

Generally, it appears that the closing delta between: a) management of liability and: b) financial engineering for advantage, underpins the European market’s uneasy dalliance with the tool.

LMEs can be a restructuring, or an action (or series of actions) as a prelude to a later restructuring. To better understand how they fit into the restructuring toolkit, we take a closer look at their chronology and evolution in Europe:
 

The current generation of restructuring and insolvency professionals came of age under the reign of schemes of arrangement and company voluntary arrangements (CVAs). Those statutory mechanisms were once the default for balance-sheet surgery: CVAs for landlords, schemes for senior lenders.

Both were familiar, predictable, and crucially with some form of court adjudication. Justice Snowden’s (as he then was) comments about rubber stamps and the court’s discretion in a 2020 failed scheme are still in the minds of practitioners.

But predictability carried a price. By the late 2010s, the U.K.’s restructuring toolkit began to show strain as court processes were efficient but rigid. Further, the lack of cross-class cramdown meant that schemes were often combined with share pledge enforcement under intercreditor agreements.

The eventual arrival of cross-class cramdown in 2020 at the height of the Covid pandemic with the new Part 26A Restructuring Plan (now referred to as the “RP” and not the “Super Scheme” as some observers suggested with futility) gave sponsors new power. For nearly four years, the RP was the restructuring debtor’s court tool of choice, but successive appeals rulings from Adler to Waldorf (see The Crisis of Confidence below) introduced uncertainty. Pre-packs administrations became more rare, as did share pledge enforcements and distressed disposals.

Against that backdrop, the out-of-court alternative, the LME, looked faster, cheaper and more adaptable.
 

Debtors’ early dabbling with the new U.S. tech were small: Oriflame in the Netherlands and Intralot’s voting gerrymander. But by 2025, European practitioners appeared fluent in the language surrounding LME, with cooperation agreements (“Coops”) arriving at the same time as a defence mechanism. A full guide to Coops can be found HERE.

According to Liz Osborne, European Head of Restructuring at Paul Weiss, speaking on an Octus webinar earlier this year, once the LME’s “non-pro-rata” variant: drop-downs, uptiers and double-dips arrived in Europe, the U.S. playbook had truly been imported.

Osborne’s colleague Kai Zeng identified Hunkemöller, Selecta and Victoria as the most poignant case studies. Each designed to exploit a New York-law high-yield bond, exploiting the relative permissiveness of U.S. indenture covenant versus English law arrangement.

These transactions shared LME DNA but were different in purpose. Hunkemöller sought liquidity, Selecta a post-enforcement capital structure reset, Victoria a maturity extension exploiting voting thresholds. In each, a subset of creditors and the company collaborated to engineer a solution that advantaged them, and crucially, disadvantaged others. The European LME has now found its coercive U.S. inspired rhythm with a flurry of challenging litigation arriving with it.
 

Europe’s resistance to the LME was framed in five key factors: the four best friends of smaller capital structures, reputational sensitivity, less permissive documents, stricter directors’ duties and then the abuse principle itself.

Under English law, creating super-seniority usually requires all-lender consent and not the 50% that can suffice under New York law. Add to that the chilling effect of criminal liability for directors in some jurisdictions (notably Germany and Italy), and the deterrents for aggressive non-pro-rata LME seemed solid. See a guide to European LME HERE.

Yet deterrents erode in downturns. As a PVTL Point article by Celine Buttanshaw observed, 2025 has shown that “aggressive LMEs in Europe now match transactions seen in the U.S.” The shallower lender pool and relationship culture once thought to restrain bad behaviour are proving elastic. Family-owned groups like Ardagh and sponsor-controlled platforms like Altice have both tested the edges of their documents often with U.S.-based funds on both sides of the table.

The moral limits within the European restructuring community, which perhaps could have previously been relied on, appear to have been stretched in tandem with the availability of lucrative non-pro-rata LME deals.
 

Few transactions captured that shift more neatly than Selecta. Octus lawyers described it as “one of the most creative LMEs seen: part consensual restructuring, part refinancing, part coercion.”

The first stage, a Dutch court-approved share-pledge enforcement transferring ownership to bondholders following default, appeared orthodox. But the second stage rewrote the rules. Bondholders were offered a Hobson’s choice: stay in a haircut post enforcement pro rata awarded instrument with equity upside, or roll into a par instrument governed by a 50% consent threshold for sacred terms. The par instrument was controlled therefore, by a Selecta ad hoc controlling group, holding roughly two-thirds of the debt.

This group had already signed a cooperation agreement, shutting out the remaining third. The result was a new form of “private cram-down” permissible under the consensual documents, but perhaps divisive in spirit.

Minority creditors have since launched actions in Dutch courts, with further litigation in New York. The Selecta template was swift and creative, however deeply unpopular with sidelined creditors. The result of the litigation (including on the enforceability under New York law of cooperation agreements) now defines the risk/reward equation for any future LME.
 

The legal system in England does have the semblance of a framework for behaviour for creditors and sponsors. As Osborne and South Square’s Adam Al-Attar KC noted, challenges to LMEs in Europe are still nascent, but the abuse of power doctrine provides a framework.

Rooted in British America Nickel (1927) and refined through Redwood Master Fund (2002) and Assénagon (2012), the abuse of power principle holds that majority powers must be exercised “for the benefit of the class as a whole.” In practice, that means coercive tactics designed purely to oppress a minority may be struck down though, as Redwood illustrates, courts are reluctant to interfere unless bad faith is clear.

It is, as Al-Attar put it, “a high threshold – but not an impossible one.”

Meanwhile, the rise of cooperation agreements (and their nemesis, “anti-coop” clauses) reflects a private-sector arms race. As Osborne cautioned, cooperation agreements can provide useful leverage but also create illiquidity and fragmentation. PVTL Point added that sponsors have already retaliated with “boycott” language in new credit agreements, designed to neutralise collective lender defences.

If the abuse principle limits what creditors can do, directors’ duties determine what they should do. Across Europe, that line is drawn unevenly. As Osborne noted, “Some regimes are more permissive than others.” France, for example, has evolved from near-impossibility to cautious flexibility as advisors test the boundaries of corporate benefit, while Germany and Italy remain more conservative, weighed down by potential criminal liability for directors if insolvency follows soon after a transaction. See Octus’ summary of the duties across Europe, HERE.

The upshot is that directors, rather than lenders, often become the de facto gatekeepers of LMEs: they must weigh short-term liquidity against the longer-term risk of personal exposure. That balance of liquidity runway versus recklessness perhaps still tempers the pace of European innovation.

A parallel set of constraints exists in the form of antecedent transaction rules, which allow insolvency practitioners to claw back pre-insolvency transfers that prejudice the estate. In England, sections 238 to 245 of the Insolvency Act 1986 provide for challenge to transactions at undervalue, preferences and voidable floating charges, a framework that has begun to intersect with LME analysis. Many cross-border deals now blend English security with continental structures, requiring advisers to map how these avoidance regimes align (or conflict) across jurisdictions.

Both directors’ duties and antecedent transaction rules (and even Coops) are “after the horse has bolted” defensive remedies for creditors. Fuller and better protections should be provided in covenant packages, although an analysis of this is for a later article.
 

The other half of the story bringing LMEs to centre stage is the English judicial treatment of creative (aggressive?) Part 26A plans. It could be said that Europe’s LME expansion coincides with an identity crisis in its formal restructuring regime. PVTL Point commented that the “Trilogy of Appeals” – Adler, Thames Water, Petrofac and Waldorf – transformed what was once a clean line between “in the money” and “out of the money” creditors.

In Adler, the Court of Appeal held that out-of-the-money creditors could not be compromised for nothing where in a relevant alternative they may have received value. In Thames Water, that such creditors could not be ignored entirely; and in Petrofac, that the two propositions must be read together. (Petrofac’s claim has since fallen away following the group’s insolvency.) Waldorf then went further, refusing sanction where benefits were not fairly distributed.

The cumulative effect: legal uncertainty and rising costs. “The difficulties the RP is facing,” as Zeng warned during the Octus webinar, are “well-telegraphed.” The built-in forum for challenge, coupled with the perception of judicial inconsistency, has made sponsors wary of Part 26A and more willing to experiment out of court.

But those same uncertainties now infect LMEs too.
 

The final act may come from pragmatism rather than principle. Legal fees on contested European LMEs are significant and uncertain outcomes introduce material execution risk. The feedback loop is obvious: More litigation means less appetite for aggression, which means more consensual deals. Further, the impact of directors’ duties and possible personal liability will be on the minds of management.

The likely destination is a hybrid world. Early-stage LMEs may morph into Part 26A plans when dissent crystallises, while restructuring plans may embed LME-style exchanges.

Cooperation agreements will exist in some deals, with anti-coop clauses preventing them in future deals. Sponsors will continue to probe for value; creditors will continue to erect blockers; and courts will adjudicate only when forced following challenge.

The creative impulse that birthed the LME will not vanish, but it may finally be constrained by economics and the cost of litigation rather than any sponsor or creditor morality.
 

If 2023-25 marks the LME’s adolescence, 2026 may bring adulthood. As litigation matures, so too will the new covenants in documentation. Expect more bespoke consent thresholds, and a renewed premium on understanding how old documents can be bent but not broken. We have seen new covenant blockers and expect to see tightening of documents post LME.

As Osborne noted, “The technology is there.” The challenge is now cultural – finding a balance between strategic ingenuity and reputational sustainability.