Highly indebted companies are ramping up their efforts to address the mounting backlog of 2025 and 2026 maturities. We anticipate these companies becoming more aggressive with liability management exercises (LMEs) as they grapple with elevated interest rates and sticky inflation. Despite optimism around the resilience of the U.S. economy, these challenges will likely continue to burden leveraged companies, further straining cash flow and making refinancing increasingly difficult.
A liability management exercise helps a company manage, modify, and optimize their outstanding debt. As restructuring law firm Mayer Brown explains, these exercises aim to achieve one or more of three primary goals: retire debt, refinance debt, and/or modify existing debt instruments. Debtwire elaborates, “the deals, which typically involve a combination of collateral reshuffling, exchanging existing debt and raising fresh funds, have become widely employed tools for companies to raise liquidity and extend debt maturities in order to buy precious time to complete a turnaround without a trip through bankruptcy court.”
During the prolonged period of low interest rates, private companies and their sponsors enjoyed issuing cheap debt. Now that the party’s over and debt repayments loom, “companies may increasingly turn to liability management exercises in 2024 if the debt capital markets don’t open up,” predicts Jacob Adlerstein, a partner on Paul Weiss’s restructuring team. He adds, “companies will continue to reach out to existing capital structure lenders and try to find ways to push out maturities and raise incremental capital from within their capital structure as opposed to outside.”
Amid this difficult operating environment, distressed borrowers will continue to exhaust all options in hopes of staving off increasingly expensive and time-consuming bankruptcies. “These liability management transactions are almost always done in the shadow of bankruptcy. And that’s a pretty powerful motivator for the company to say to its lenders, you know, if you don’t agree to this out-of-court transaction, we have the option of bankruptcy in the back pocket,” said Lisa Holl Chang, a partner in Mayer Brown’s restructuring team.
“I’m confident that, unless something changes materially, 2024 is going to be even busier than 2023,” said Scott Greenberg, global co-chair of Gibson Dunn’s restructuring practice, adding that “it will be a combination of straight-up restructurings for companies that finally tip over and a tenfold amount of liability management transactions.”
Liability Management Exercises vs. Restructurings
With such tools at their disposal, U.S. companies and their sponsors are seeking to implement an LME in the first instance, rather than launch a restructuring process. Akin Gump Strauss Hauer & Feld LLP suggests cost as a potential driver, “finding a solution under existing agreements, without navigating competing stakeholder demands or lengthy court proceedings, likely comes with a lower price tag.” However, U.S. experience shows that despite efforts to avoid restructuring with an initial LME, several companies have later filed for bankruptcy. While liability management exercises are valuable and effective in addressing short-term issues, they don’t guarantee avoiding a larger restructuring, as evidenced by the bankruptcies of Neiman Marcus, Revlon, Envision Healthcare, Robertshaw, and Wesco.
Distressed companies are scrambling to shore up their balance sheets and improve liquidity, making liability management exercises a critical area for credit professionals to monitor in 2024. While LMEs can provide breathing room for companies facing difficulties, understanding their impact is crucial for informed credit decisions. As stated earlier, LMEs involve extending debt, exchanging debt, or modifying terms, which can raise concerns about a company’s long-term financial health.
