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How liability management exercises shaped 2024 and what’s next for 2025 

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Summary 

Liability management exercises (LMEs) were a defining feature of 2024, driven largely by loose documentation, abundant capital, and an evolving market playbook that normalized these transactions. The Octus webinar, led by Jared Miroff, Stressed/Distressed Research Manager, alongside expert panelists Eugene Lee (Managing Director, Lincoln International), David Schiff (Partner, Davis Polk), Kevin Eckhardt (Deputy Managing Legal Editor, Octus), and Julian Bulaon (Senior Covenants Analyst, Octus), examined the economic and legal factors behind LMEs and offered critical insights into their future applications.

Key highlights include:

  1. The environment driving LMEs: Loose documentation, creative investor maneuvering, and high liquidity in 2024 created ideal conditions for LMEs. However, panelists questioned their sustainability in a potential economic downturn or recession, as companies may require deeper operational fixes rather than balance-sheet adjustments.
  2. The rise of precedent and creativity: Industry veterans noted a shift in LME practices from innovation to standardized production, which has invited additional scrutiny from courts, particularly through cases like Serta and Wesco. These legal precedents continue to shape borrower and lender strategies.
  3. The evolving legal landscape for LMEs: The December 31 Serta decision marked a key moment, curbing the ease of restructuring under “open market purchase” clauses. According to panelists, this ruling not only complicates non-prorata uptiers but may also lead to increased inclusion of drop-down provisions and more cautious deal structuring.
  4. The pivot toward operational restructuring: Panelists stressed that LMEs often “buy time” rather than fix underlying business problems. Operational restructuring, potentially through bankruptcy, will play a more significant role if economic conditions tighten.
  5. Co-op agreements as protection: Cooperation agreements have emerged as a tool for lenders to safeguard their positions. However, panelists agreed these agreements are still in flux, with potential challenges looming as their adoption grows.

The webinar culminated in a forward-looking discussion on the economic and legal challenges that could shape LMEs in 2025 and beyond. The expert panel predicted that while LMEs will remain a valuable tool, their forms and frequency may adapt to shifting market and judicial dynamics.

Watch the full webinar to gain deeper insights into how LMEs will evolve and shape credit markets in 2025.