Blog Post
LMEs are getting less aggressive, but are creditors better off?
Liability management exercises (LMEs) may be getting less aggressive, but that doesn’t make them any easier on the creditors left out of the deal. That was the through line of the LME debate at our New York Forum on October 1, where speakers expected the drift toward “pro-rata-ish” deals to continue.
The sharper argument was over motive. Does the cost of bankruptcy push companies into out-of-court deals, or is it a convenient excuse? Our data gives the question weight. More than half of the companies that completed a dropdown filed for bankruptcy about 22 months later (Octus LME database). For them, the out-of-court deal postponed a filing rather than avoiding one.
For investors who may end up as minority creditors, the debate turned to a harder question: how do you manage a position when knowing the documents isn’t enough? Our reporting shows both sides. InPost’s LBO financing carried a record covenant score of 4.81 from our team, including the first anti-cooperation language we’d seen, until prospective investors pushed back. The final terms added J.Crew, Chewy and Serta blockers and dropped the anti-cooperation language, with term loan pricing at E+325 and a 99 OID. At Optimum, meanwhile, creditors have formed a litigation committee to fund a challenge to a dropdown.
Investor pushback works when borrowers have nowhere else to go, but so far the market has given investors little leverage. Leveraged loan issuance rose 13% and high-yield issuance 27% year over year in the first half. SoftBank priced the largest high-yield offering on record, at more than $11 billion, on order books above $40 billion. Documents will tighten only where buyers are willing to walk away, and InPost may be more exception than trend.
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