Partner Tristan Axelrod Explores Liability Management Transactions in LexisNexis Practical Guidance

Partner Tristan Axelrod published an article in LexisNexis Practical Guidance exploring the current developments in “uptier” or “liability management” transactions (LMTs) and related legal challenges.

The article, published in the July edition, detailed the background of economic and legal developments that have led to the recent spate of LMTs, as well as claims raised by aggrieved creditors challenging LMTs and some notable recent decisions.

LMTs allow a borrower to evade certain secured lenders’ sacred rights provisions and create a higher tier of new, super senior secured debt funded through a combination of new money and rollups or exchanges of old debt held by favored parties.

LMTs can help distressed businesses survive by accessing new capital or deleveraging on better terms than would be otherwise available, he explained. They prolong the runway for management of a distressed company to maintain leadership positions and avoid or delay insolvency proceedings and director and officer liability litigation.

“The transactions are clearly harmful, however, to the interests of all parties below favored lenders in the capital structure,” Axelrod wrote. “Creditors likely face subordination, erosion of collateral value, and steep decreases in the trading value of their debt. In a restructuring or bankruptcy, creditors face decreased prospects for recovery.”

From a creditor’s perspective, LMTs present a classic but perhaps more-sinister-than-usual deepening insolvency scenario, he wrote. In the years preceding the proliferation of LMTs, prominent courts rejected borrower and management liability for deepening insolvency per se, forcing creditors to rely on breach of contract, fraudulent transfer and breach of fiduciary duty claims to counter abusive borrower practices.

“The lender-on-lender nature of LMTs likewise deprives some creditors (such as unsecured creditors with no privity of contract and debatable economic interests in collateral) of an obvious right to contest transactions before the debtor and favored lenders lockdown the company’s value,” Axelrod wrote. “Accordingly, the last several years have seen increasingly aggressive and creative litigation efforts across state and federal district courts as well as bankruptcy courts, as aggrieved creditors seek a path to challenge transactions and restore bargained-for value” in notable cases such as J. Crew, Revlon and Serta Simmons.