Davis Polk partner David Schiff discussed the growth in popularity of liability management transactions (LMT) with Debtwire.

“The overall growing awareness and perception among private equity sponsors that these tools exist and have become widely accepted is also contributing to the rise in popularity of LMTs,” David noted.

When asked about the evolving dynamics of liability management and the increasing number of double dip transactions being employed in the market, David added that a modified version of the double-dip, the so-called “pari plus” structure became popular last year and will continue to be. David explained that these structures involve lenders putting in a new financing secured by pari passu liens on the collateral that secures a company’s existing debt, along with separate standalone collateral that was previously unencumbered or that was dropped out of another creditor’s collateral package. The structures and documentation used to set up these transactions can be complicated and might include intercompany loans and bespoke intercreditor agreements. Often, they are set up to combine pockets of flexibility across multiple covenant baskets.

David mentioned that along with more complex structures, borrowers are pushing lenders to sign more expensive non-disclosure agreements going into liability management negotiations with companies. “The provisions are becoming more aggressive in some cases and can include terms that have nothing to do with confidentiality at all. For example, lenders are in some cases pushed to sign these agreements before they have organized in a group or engaged counsel, and the draft agreements will include commitments to not join an ad hoc group, not sign a cooperation agreement and not challenge the legality of a transaction, sometimes for a period of a year or longer,” he said.

“Liability management deals heat up amid widespread borrower stress,” Debtwire (February 2, 2024) (subscription required) 

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