The Year in LMEs: Fewer Transactions but Busier Lawyers, With Serta and Mitel Decisions Setting the Stage at Start of Year

This past year saw major changes in the liability management landscape, with developments both in-court and out-of-court. During the year, Octus wrote stories on more than 40 different names regarding active or potential liability management exercises, or LMEs, across public and private markets.

We will host a webinar on Tuesday, Jan. 13, to discuss the LME trends of 2025. To register, click HERE.

According to Google Trends data going back to 2016, searches for “liability management” peaked in July 2025 and again in November 2025, with activity overwhelmingly and unsurprisingly concentrated in New York City.

Octus’ own publishing history tells a similar story. Articles mentioning “liability management” reached an all-time high in 2025, particularly in the second half of the year, when we published the largest volume of LME-related content in the company’s history.

The topic escaped confinement in 2025. Mainstream business outlets ran features heralding the rise of star LME dealmakers and the death of the bankruptcy lawyer. Industry conferences discovered that no agenda was complete without an LME panel, regardless of the nominal topic or audience. Precocious undergraduates published blog posts on non-pro-rata DIP rollups and pari-plus syndications. Social media influencers with tens of thousands of followers cracked jokes about aggressive sponsors and the melancholy of the minority lender.

Perhaps sensing the saturation, it has become fashionable in some circles to signal awareness that LMEs may be past their cultural prime, often followed by half-hearted attempts to talk about literally anything else. We do no such throat-clearing here. This is the Octus LME Year in Review. And while you may be done with LMEs, LMEs are not done with you.

The New Year’s Eve 2024 decision in Serta set the stage for much of the LME discourse in 2025. The immediate reaction was swift, confident and mostly wrong, though wrong in a useful way. Some declared it the end of uptiers. Others proclaimed the rise of drop-downs. Many celebrated it as the long-awaited death of non-pro-rata transactions altogether.

These initial reactions to Serta all shared a common flaw. They reflected a persistent tendency to conflate two distinct steps in the LME playbook: (1) the non-pro-rata exchange and (2) the subordination that accompanies it. They also underestimated the breadth of carve-outs and exceptions to pro rata sharing protections embedded in modern credit agreements.

The 2020 Serta transaction was a non-pro-rata uptier with two analytically distinct components: (1) the non-pro-rata exchange using the “open market purchase” exception to the credit agreement’s pro rata sharing provision and (2) the contractual subordination of liens with majority consent.

The Fifth Circuit’s decision addressed only the first step. It held that the open market purchase exception, as drafted, could not be used to effect a privately negotiated, non-pro-rata exchange of the type executed in 2020. As a result, that particular pathway to non-pro-rata treatment is practically no longer viable, at least on similar facts.

What the decision did not do is equally important. It did not affect the feasibility of the lien subordination step. That question remains governed by the presence or absence of the eponymous “Serta blocker”: the contractual protection that prohibits lien or payment subordination without the consent of each affected lender.

Nor did the Fifth Circuit eliminate non-pro-rata exchanges more broadly. The decision addressed one specific exception to pro rata sharing, but that exception is only one of several. Other paths remain available, including “extend & exchange” structures such as those used in Better Health and Oregon Tool, carve-outs for privately negotiated purchases, Mitel-style carve-outs for purchases with no “open market” requirement, and credit agreements in which pro rata sharing is not elevated to sacred-right status at all.

Early post-Serta commentary, therefore, missed the larger point. The opinion closed one door but left many others open, underscoring a theme that would recur throughout 2025: LMEs are modular. They are built from discrete legal and contractual components that can be mixed and matched to create increasingly complex structures, such as “extend & exchange” into double-dip-plus (yes, that is a real transaction).

To help address this confusion, we introduced what we half-jokingly called the “LME Cookbook” (or, for those who prefer customization metaphors, the LME Chipotle menu). The aim was not to celebrate these transactions but to provide a clearer framework for analyzing their moving parts.

Like the year before it, 2025 was characterized by the continued prevalence of “consensual” LMEs, transactions executed with existing lender groups that obtained the requisite consent levels to overcome contractual obstacles and deliver some combination of liquidity, runway or discount. Deal-away transactions, though consistently threatened and heavily litigated in the abstract, remained few and far between, with Optimum’s, fka Altice USA’s, $2 billion drop-down in November standing out as a notable exception rather than a directional shift.

The centrality of the consensual LME as the most likely endgame has placed a premium on controlling the vote. That dynamic did not emerge in 2025, but it escalated meaningfully over the course of the year, with increasingly visible and consequential maneuvering by both creditors and borrowers.

In 2024, we chronicled the rise of the cooperation agreement as an early move by lender groups seeking to organize ahead of a potential LME and control their own destiny. Those agreements continue to evolve, including their varied use as a sword or shield, and as a tool to predetermine tiered outcomes while minimizing litigation risk.

In 2025, our attention shifted to the company-side response to lender cooperation, which increasingly took the form of aggressive efforts, often at the syndication stage, to limit creditor coordination altogether, including attempts to insert anti-cooperation provisions, voting caps and expanded disqualified lender lists.

Octus documented at least 13 attempts in 2025 to insert some form of anti-cooperation provision into loan or bond documentation, though only three were ultimately successful: Warner Bros. Discovery in its investment-grade bonds, Getty Images through an exit consent and Optimum Communications in a bespoke drop-down agreement that was not broadly syndicated.

That record underscores how far the market remains from broad acceptance of these provisions, with each outcome appearing driven by deal-specific leverage rather than a wholesale shift in market norms. Even so, the headline tally obscures the more consequential development. Anti-cooperation language is no longer unprecedented, and each accepted iteration has pushed further than the last.

The WBD provision was comparatively narrow, targeting cooperation intended to boycott new-money transactions while leaving defensive coordination to protect existing debt largely untouched. Getty Images went further, extending the prohibition to defensive cooperation. Optimum’s provision was the most aggressive yet, requiring periodic certifications of noncooperation and purporting to deny payments, and even cancel debt, owed to lenders found to be in breach.

Outside the four corners of the debt documents, the most significant challenge to creditor cooperation in 2025 came from litigation. Lawsuits filed in Selecta and Optimum sought to invalidate cooperation agreements on federal antitrust grounds. The incentives of the plaintiffs in those cases, however, differed in important ways. The Selecta challenge was brought by a group of minority noteholders and can be read as cabined to invalidating the specific cooperation agreement at issue, rather than cooperation agreements writ large. The Optimum challenge, by contrast, was brought by the company itself, which has little incentive to preserve the enforceability of cooperation agreements as a general matter and every incentive to undermine them where possible.

As LMEs have accumulated over the past several years, so too has the stock of post-LME documentation. As we have written about extensively, these documents contain materially tighter lender protections intended to foreclose the possibility of subsequent aggressive transactions. While post-LME documents are uniformly more restrictive than regular-way BSL and high-yield bond documents, their relative strength varies meaningfully from deal to deal.

Post-LME documents are bespoke and must be evaluated individually, but one pattern has become increasingly clear. Because lender protections tend to be reactive rather than forward-looking, earlier post-LME vintages often lack targeted defenses against transaction structures that emerged later. For example, a post-LME document executed in 2022, before the 2023 At Home and Sabre transactions, is less likely to contain explicit double-dip or pari-plus protections. For similar reasons, post-LME documents closed before 2025 are less likely to include so-called Better Health blockers that elevate pro rata extension offer requirements to sacred-right status.

Many post-LME companies remain distressed and are likely to require another restructuring in the near term. What form that restructuring takes remains uncertain. Will there be an increase in so-called LME-squared transactions, as seen in Robertshaw and Apex Tool? Will tighter documentation that forecloses value extraction from other lenders ultimately push more companies into in-court restructurings? Further, if cases do land in court, will there still be opportunities to extract value through non-pro-rata DIP rollups or other “in-court LME”-style maneuvers? We expect 2026 to shed more light on each of these questions.

2025 kicked off with two seemingly contradictory LME decisions on New Year’s Eve – the Fifth Circuit’s takedown of what former judge David R. Jones called a “Position Enhancing Transaction” in Serta Simmons and the New York Supreme Court Appellate Division’s endorsement of indirect sacred rights-trampling in Mitel – setting the stage for a year of confusing and contradictory messaging from the courts on LMEs. Things didn’t get any simpler as the year went on.

Thanks to Serta, on Jan. 1, 2025, it appeared that filing chapter 11 in Houston was no longer the way to end a contentious LME fight quickly and conclusively in favor of the participating lenders – a strategy we called the “LME Two-Step” in 2023. Jones’ handling of Serta set the playbook: undertake an aggressive LME, file chapter 11 in Houston a few months later, sell the bankruptcy process to the participating lenders via a DIP and plan sponsorship, get the complex panel to confirm a plan that recognized the validity of the transaction and leave the excluded group with a worthless general unsecured claim (or, even better, nothing at all).

In last year’s LME roundup, we noted that prior to Serta, “the message to companies and advisors was clear: If you undertake an uptier exchange or, really, any questionable liability management exercise and get a negative decision from a New York state or federal court allowing breach of contract claims to proceed, you can always file and get a quick, favorable second opinion from the complex panel in Houston.”

When the Fifth Circuit blew up Serta – in a written decision with a real whiff of grapeshot for all LMEs – every company considering a filing in Houston after undertaking an LME had to think twice. Thanks to Mitel, on Jan. 1, 2025, it appeared that litigating over the validity of the LME in New York state court was the better option. Mitel appeared to support the proposition that allegations of indirect interference with sacred rights would be insufficient for excluded lenders to even state a claim for breach of contract and get to discovery.

Getting LME litigation dismissed at the pleading stage is even cheaper and faster than getting a rubber stamp in Houston – no chapter 11 administrative expenses, no disclosure statements or plans, no travel expenses for a sweltering trip to Harris County in August. We seemed to have clear, concise advice for that client looking to undertake an LME: Don’t worry, just don’t change the actual text of the sacred rights provisions and you’re golden in New York.

Alas, it could never be that simple. First, the Houston complication: In September, U.S. District Judge Randy Crane unexpectedly said he would reverse Judge Marvin Isgur’s pre-Serta oral ruling voiding the Incora/Wesco uptier transaction. In his Dec. 8 written opinion, Judge Crane ripped Judge Isgur’s “domino transaction” theory to shreds: In order for an amendment to “have the effect” of releasing the excluded noteholders’ collateral, he suggested, the amendment itself had to have the “immediate effect” of releasing the collateral.

In other words, Judge Crane seemed to port the Mitel “direct effect” amendment requirement into Houston case law. Wesco’s amendment allowing the issuance of new notes to give a simple majority the supermajority it needed to do an uptier and release the excluded noteholders’ collateral didn’t count, Judge Crane concluded, even though it was obviously part of the larger uptier transaction. Faced with sophisticated parties involved in complex transactions, the judge felt the separate legal steps of the transaction had to be respected.

Judge Crane also attempted to cram Serta into the smallest possible factual box by pulling the oldest judicial trick in the book: According to the district judge, Serta, a decision with some very strong language suggesting disapproval of LMEs in general, actually bolstered his conclusion that this particular LME was kosher. Serta “underscores the importance of adhering to the precise language of indenture agreements,” Judge Crane asserted, while effectively writing the insufficiently precise “have the effect” language right out of the indenture agreements.

According to Judge Crane, in Serta, the credit agreement included a provision requiring the company “to obtain unanimous consent from its existing noteholders in order to engage in an uptier transaction,” whereas such a provision was lacking in the Wesco indenture. Under the guidance of Serta, then, the Wesco uptier was fine. By extension, every uptier is fine, so long as the credit agreement doesn’t include a sacred right barring uptiers. “Serta is dead,” Judge Crane effectively declared, citing … Serta.

Except: Did the credit agreement in Serta actually have such a provision? Recall what Judge Andrew S. Oldham actually said in Serta: “[W]hile the loan market has seen an increase in contracts blocking uptiers (so-called ‘uptier blockers’) since 2020, there are doubtless still many contracts with open market purchase exceptions to ratable treatment. Though every contract should be taken on its own, today’s decision suggests that such exceptions will often not justify an uptier.”

Isn’t that Judge Oldham explicitly recognizing that the Serta credit agreement did not have an “uptier blocker”? Judge Oldham noted that the Serta transaction “was the first major uptier”; how could the agreement include an “uptier blocker” if it was the first of its species?

Meanwhile, one judge in New York Supreme Court took it on herself to rein in the Appellate Division’s pro-LME Mitel ruling. In July, Justice Anar Rathod Patel issued a bench ruling denying in part motions to dismiss challenges to Hunkemöller International’s 2024 uptier. Without explaining much, Justice Patel concluded that several of the excluded noteholders’ breach claims against the company – but not majority holder Redwood – could go forward despite Mitel.

Then, on Jan. 3, 2026 (still 2025 by our standards!), Justice Patel pulled a Wesco of her own in the STG Logistics drop-down litigation. Justice Patel’s approach to Mitel in STG is similar to Judge Crane’s approach to Serta in Wesco: try to cram it into the smallest factual box possible. She found that Mitel is distinguishable because the parties in Mitel did not actually modify the credit agreement at issue, whereas in STG, they did. “[I]n the instant case,” Justice Patel says, “textual changes were made” to the pre-transaction agreement, “in contrast to the unchanged credit agreement in Mitel.”

The judge also tosses in a totally unexplained kicker: The defendants’ “narrow reading” of the sacred rights provisions as only barring changes to the text of those provisions makes the sacred rights provisions “ambiguous at best.”

Really? Did the uptier agreements in Mitel make zero changes to the pre-transaction credit agreement? Is an agreement “ambiguous at best” because it creates a bright-line rule allowing amendments that indirectly affect sacred rights while barring only those that change the actual text of the sacred rights provisions? Didn’t Judge Crane go to great lengths to explain in Wesco how reading the “have the effect” language broadly would actually create more ambiguity?

Justice Patel tries to dress this all up by concluding that the entire STG drop-down, including credit agreement amendments, an intercompany agreement and a drop-down agreement, was a “single integrated transaction,” a la Judge Isgur’s Wesco ruling, but she doesn’t clearly explain how this effectively distinguishes the “direct effect” rule seemingly endorsed in Mitel. She also doesn’t confront the fact that Judge Crane reversed the Wesco “integrated transaction” ruling.

Does a modification contained in a drop-down agreement become a modification of the sacred rights provisions in a credit agreement if the drop-down agreement and amendments to the credit agreement are, as Justice Patel puts it, “executed at the same time, by the same parties, for the same purpose, and in the course of the same transaction”? Judge Isgur might say yes, but he’s not the final authority on that anymore.

If the court in Mitel felt changes in an actual credit agreement amendment did not sufficiently touch on excluded lenders’ sacred rights for the claims to be actionable, how could changes in a separate agreement, even if “integrated” with amendments to the credit agreement, possibly state a claim?

Justice Patel also distinguishes the Mitel court’s dismissal of the excluded lenders’ implied covenant of good faith and fair dealing claims, which we thought had been dead and buried for years. Every New York court to consider those claims has dismissed them except one: Justice Andrea Masley’s 2022 decision in Boardriders. Mitel merely went with the flow on this one, but Justice Patel was unconvinced and agreed with Boardriders.

“Plaintiffs sufficiently allege facts and conduct in support of their claim for breach of the implied covenant that are distinct from their breach of contract claims,” the judge says, because the implied covenant claim assumes the drop-down was valid. Wait, what? The implied covenant claim survives not despite, but because it assumes the drop-down did not breach any of the actual, explicit provisions of the pre-transaction credit agreement?

According to Justice Patel, this apparently quizzical conclusion stems from the inclusion of additional protections added in an amendment to the credit agreement prior to the transaction. “[T]he crux of Plaintiffs’ allegations are that Defendants’ amendments” to the credit agreement “flew in the face of their reasonable expectations of negotiated lender protections,” whereas in Mitel, “the parties did not specifically negotiate amendments to prohibit the contested transaction.”

But if the difference between STG and Mitel is the existence of explicit protections against certain LME transactions in the STG credit agreement, how does that support an implied covenant claim, which is by definition not based on explicit protections?

We’re sure there are some reasonable answers to all these questions re: how Judge Crane’s Wesco decision and Justice Patel’s STG opinion jive with Serta and Mitel, respectively. Y’all are a lot smarter than we are and get paid by the hour to synthesize these apparent contradictions and come up with a Unified Theory of Will This LME Get Undone by the Courts or Not for your clients. But we’re not altogether interested in those answers.

What we are highlighting here at the dawn of 2026 is that, as at the dawn of 2025, we are still only beginning to construct that Unified Theory, almost six years into the modern LME era. We don’t know, and you don’t know, how this or that court will come down when considering a particular maneuver, appellate precedent be damned.

Judges are humans, and their reactions to LME transactions still seem more vibes-based than facts-and-law-based. Judge Crane looked at Wesco and saw a bunch of big, fancy investors with armies of expensive lawyers and advisors. He concluded, roughly, that “these guys could have protected themselves from this chicanery and may participate in it on the next deal, so all’s fair.”

Justice Patel looked at STG and saw a transaction where the majority amended a credit agreement to allow the company to indefinitely extend interest payment grace periods until maturity and then argued that amendment had no effect on the minority’s sacred right to receive timely interest payments. She concluded, roughly, that “this is too cute by half and simply cannot be what the agreement intended.”

If STG files chapter 11 as expected, the bankruptcy judge might see a company struggling to reorganize while beset by fights among lenders over what happened in the past, and do what he or she feels is necessary to get the company past that and into the future – even if it means the excluded lenders get kerploded.

Humans don’t respond to our brilliant draftsmanship, legal creativity or even precedent as much as they respond to narrative. Keep your clean and simple answers to yourself and your clients – we’re here for the ongoing story of the LME.

At the start of 2025, market participants were focused on the impact the Fifth Circuit’s Serta decision might have on LMEs. The question on everyone’s lips was whether non-pro-rata transactions would become a thing of the past or would the market adjust to the change and keep on keeping on.

A year later, it does look as if the Serta decision was more impactful than some may have thought as the number of transactions for 2025 that involved uptiers, drop-downs or pari-plus debt, whether singly or in combination, at 28 was a step back from the pace of 2024 (34) toward 2023 levels (23).

While we saw an initial dip in transaction count in the first quarter, at least five of the seven first-quarter transactions that included an uptier were non-pro-rata including Trinseo, Better Health, Sinclair Broadcasting, Oregon Tool and B. Riley Financial, although the latter involved the uptiering of unsecured notes and therefore did not include a lien-stripping component.

Transaction volume increased into the second quarter, almost matching the level seen in the second quarter of 2024, with 11 total transactions, all but one of which, Bausch Health, included an uptier component (Ivanti also included pari-plus debt). Of those 11 transactions, at least five were done on a pro rata basis, while Quest Software, Wellness Pet, B. Riley and Saks were all non-pro-rata, with B. Riley again uptiering unsecured notes. It should also be noted that we believe there does not appear to have been a great deal of value moved among the creditor groups in the Wellness Pet transaction.

LME volumes really fell off in the second half of the year, as we recorded only one transaction in each of July, September and October. Significantly, of the six uptiers closed during the second half at least four were done on a pro rata basis, while Newfold Digital Holdings’ transaction had more than 90% of lenders participating in the initial transaction.

It remains to be seen whether the second half of 2025 reflects a sea change in the politics of uptiers or is simply a function of a lower level of transactions, which also may be driven, albeit with a lag, by the Serta decision. It may be that companies and sponsors have decided that the cost/benefit analysis for a non-pro-rata uptier no longer makes sense given the time and money associated with fighting holdouts. Or it may be that the universe of companies for which a non-pro-rata uptier makes sense is less than it was a year ago as companies that have already done an LME now have tighter debt documents, forestalling an additional transaction.

One interesting trend that we saw continue in 2025 and that bears watching is companies taking advantage of the structures put in place in their previous LMEs. For example, Bausch Health recently completed a $1.6 billion exchange offer, cutting 2028 maturities by about $1.7 billion by utilizing its subsidiary that holds the majority of its Bausch + Lomb shares. The company initially utilized this subsidiary in its March refinancing that raised almost $8 billion.

Sabre as well, in the early part of the year, launched a refinancing transaction using the issuance of new senior secured notes to pay off $900 million borrowed under its pari-plus term loan originally borrowed in mid-2023. Alas, the relief Sabre’s other creditors felt at this must have been short-lived as the company tapped the capital markets again in late November, raising $1 billion in new pari-plus debt with a similar structure.

To access the rest of this analysis, please reach out to [email protected]