Liability management
By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching
7 min read · updated October 7, 2026
The last few lessons followed a company into Chapter 11. Most distressed companies try something first: a liability management exercise, or LME, an out-of-court deal that uses the flexibility in the company's own debt documents to raise new money or cut its debt. LMEs have become one of the most common outcomes for a distressed company, and one of the most contested. This lesson is current as of October 2026; the law here is still moving, so check for later rulings before quoting a case as settled.
Why LMEs took off
Two things made them possible. Most leveraged loans are now covenant-lite, with no maintenance tests that would let lenders step in early. And most credit agreements let a simple majority of lenders amend the terms, with only a short list of "sacred rights" that need every affected lender's consent. Add loose negative covenants, such as wide investment baskets, room to move assets into unrestricted subsidiaries and carve-outs from the rule that payments are shared pro rata, and a company that can win over a majority can change the rules for everyone. The lenders who are left out have limited protection.
That turns a restructuring into a contest between creditors. The company offers a deal to a majority, the majority get better treatment, and the minority are left worse off. In the market this is often called "creditor-on-creditor violence".
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Frequently asked
- What is a liability management exercise?
- An out-of-court transaction in which a struggling company uses the flexibility in its debt documents to raise new money or reduce its debt, usually with the support of a majority of lenders and often at the expense of the lenders left out. The main forms are uptiers, drop-downs and double-dips.
- What is an uptier?
- A transaction in which a majority of lenders amend the credit agreement to allow new debt that ranks ahead of the existing loans, then exchange their own loans into that new senior debt. The lenders left out keep their old loans, which now sit behind the new debt.
- Why do lenders sign co-operation agreements?
- To stop the company picking off a majority to do a deal that leaves the rest behind. Lenders in a co-op agree to negotiate only as a group and to share any deal pro rata, so the company cannot offer better terms to some of them.
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