As business leaders consider liability management exercises (LMEs), which are an increasingly popular method, it’s critical to explore the efficacy and limits of out-of-court debt restructuring.
The liability management exercise is an umbrella term for an out-of-court method that restructures a distressed company’s debt obligations. LMEs have become the default tool of choice for overleveraged borrowers and their private equity sponsors, with their use exploding in recent years.(1) Because LMEs are trending as go-to tactic, it’s important to consider whether an LME can reliably support a credible operational turnaround.
At its core, an LME is any transaction, or series of transactions, that modifies a company’s debt obligations outside of a formal court-supervised insolvency process. Whether structured as drop-down transactions, up-tier exchanges, distressed exchanges, or amend-and-extend transactions, the legal mechanics differ, but the objective is the same:
