Court Awards Damages in Liability Management Exercise Dispute
Corporate borrowers and lenders must reassess liability management exercises after a court granted damages in a recent challenge.
A court has issued a damages ruling against parties involved in a liability management exercise (LME), signaling heightened judicial scrutiny of these increasingly common debt restructuring tools. LMEs—such as uptiering transactions, drop-down financings, and preferred equity structures—have grown popular among distressed borrowers seeking flexibility, but have drawn lender opposition and litigation. The damages award suggests that improperly structured or executed LMEs may carry meaningful financial exposure beyond mere unwinding. In-house counsel at companies with leveraged capital structures should review existing debt arrangements, evaluate any contemplated LMEs for litigation risk, and assess whether intercreditor agreements provide sufficient protection. Lenders should audit covenant packages and consider protective provisions in future financings.