Debt Restructurings Ramp Up in Out-of-Court ‘LMEs’

Deterioration of lender protections has combined with volatile economics to drive an increase in liability management exercises (LMEs), or aggressive attempts by leveraged companies to avoid bankruptcy by restructuring their senior debt outside of court.

LMEs were running at an all-time high of 34 in August, according to Pitchbook | LCD’s trailing 12-month calculation. That was up from 15 a year earlier and only four in August 2022 – after a pandemic-period spike had subsided and before the Federal Reserve ramped up interest rates to counter inflation.

Many that go the LME route end up in bankruptcy anyway, says S&P Global Ratings.

At the same time, the trailing 12-month count of payment defaults fell to 15 in August, from 22 in August 2023.

Tilting the Field

LMEs have become easier to deploy as a multitude of institutional investors with diverging interests have displaced major banks in loan syndications, which like bond deals now have fewer and looser covenants.

Low interest rates and strong investor demand for higher-paying bank paper have also contributed to a deterioration of investor protections when negotiating loans. In...