2025 Wharton Distressed Investing and Restructuring Conference Recap

Welcome to the 118th edition of the Pari Passu newsletter. 

In December 2024, we covered the Distressed Investing Conference to discuss trends in liability management exercises (LMEs), bankruptcy litigation, and private credit restructuring.

Today, we are back with another special post at 2025 WRDIC with more nuanced insights into LMEs per the conference theme, “Beyond Bankruptcy: Innovative Approaches to Liability Management.” But as a plus, we’re also here with entertaining stories from industry legends and relatively niche topics from structured financing to distress in early-stage companies. Given recent developments in restructuring, such as the Serta court ruling and the rising popularity of cooperation agreements, let’s kick off 2025 by learning how industry professionals are navigating the 3.0 era. 

But First, a Message from Hebbia

Work a grind? It doesn’t have to be. Hebbia lets you do in minutes what used to take hours. Need to summarize a credit agreement or build a CIM? With Hebbia, you can do it faster than your MD can say, “This is what you signed up for.” 

By automating repetitive tasks and synthesizing endless data into clear, actionable insights, Hebbia frees up PE / credit pros to focus on what they actually signed up for: making deals, growing companies, and maximizing returns (and avoiding Chapter 11).

Book a 20-minute demo to see why 1/3rd of the largest asset managers trust Hebbia. 

Table of Contents

• But First, a Message from Hebbia

• A Brief Overview on Liability Management

• LMEs: Past, Present, & Future

• Keynote: The Evolution of LMEs with Josh Abramson

• Keynote: Ken Moelis

• LME 3.0: The Next Generation of LMEs

• Structured Finance as an Innovative Approach to LME

• Developments in Chapter 11 and Cross-Border Restructuring

• Bankruptcy Alternative for Early-Stage Companies

• Conclusion

Before We Begin—A Brief Overview on Liability Management

Liability management (LM), also referred to as liability management exercises and liability management transactions (LME or LMT) was a constant thread throughout many of the panel discussions below. It is worth defining before we move on to conference content. 

Despite being frequently used in an out-of-court context, LME is a broad term that includes out-of-court and in-court solutions for distressed companies to address near-term debt maturities or reduce their debt load. On one side of the spectrum, companies can pursue less aggressive, consensual out-of-court restructurings such as debt repurchases, equitization, amending terms and extending maturity dates, exchange offers, and asset sales. Unable to boost profitability even with cost-cutting, companies like WeWork first explored out-of-court solutions to reduce $1.5bn of debt, raise $1bn of new capital, and push back maturity walls. Yet even with these efforts, WeWork’s inability to negotiate their $13.3bn lease liabilities forced them to file Chapter 11. While out-of-court solutions are prioritized for most borrowers to avoid hefty costs, in-court solutions still bring considerable value for certain capital structures and business models – a big topic for one of the panels.   

 However, in the low interest-rate environment, credit documents have become loose enough for borrowers and sponsors to push for aggressive LMEs to deleverage and raise extra capital. Usually, these come at the cost of pitting creditors against each other to fight for limited recoveries. Ever since J.Crew launched its famous asset drop-down in 2017, the market has seen different variations: uptier exchanges as seen in Serta Simmons, drop-downs as seen in Neiman Marcus, double-dips as seen in At Home, and pari-plus financings as seen in Trinseo. Not surprisingly, as borrowers continue to suffer from low liquidity, companies like Spirit Airlines have even explored triple-dips, which still have open-ended questions on how they will be executed and treated in-court. As credit docs are still loose while borrowers and sponsors are still willing to find creative approaches to address highly leveraged capital structures, the conversation around LMEs continues.

Talking about LMEs, you should check out the latest paper by Octus (Reorg) titled Understanding and Navigating Liability Management Exercises.

LMEs: Past, Present, & Future

• Brian Shartz: Kirkland & Ellis (Partner, Restructuring)

• Patrick McGrath: Anchorage Capital Group (Partner, Global Head of Restructuring)

• Avi Robbins: PJT Partners (Partner, Restructuring)

• Zachary D. Rosenbaum: Kobre & Kim (Partner)

• Roopesh Shah: Evercore (Senior MD, Restructuring and Debt Advisory Group)

• Alex Tracy: Perella Weinberg Partners (Partner, Restructuring and Special Situations Group)

In this panel, bankers, investors, and lawyers converge to share views—sometimes diverging—on the newest developments in liability management. 

The panel began by defining the objectives of LM, noting that out of the three primary goals, (1) discount, (2) maturity extension, and (3) new capital, companies usually must pick, at most, two out of three, given the trade-offs. From 2023-2024, there have been shifts in both objective and/or process on both debtor and creditor-side. 

• Debtor: In 2023, LM was primarily used to inject liquidity or maximize discount for struggling companies. However, in 2024, LM was sometimes a purely opportunistic discounted exchange without impending liquidity crisis, or even used to raise capital for M&A. 

• Creditor: While there was minimal pre-process in LM 1.0, in 2.0, there exists a pre-process where creditors aim to join what one lawyer termed the “cool kids table,” where creditors may enter a cooperation agreement—a binding agreement between creditors to work together on potential restructuring plans, vote in favor of any future group-approved restructuring proposal, and reject proposals not supported by the group. This lowers the risk of the debtor negotiating with an in-group of creditors at the expense of the out-group. Tellingly, the legal representation of creditors is now more concerned about trying to enter the in-group than suing.

In a LME, there can be either a lot of discount captured from few holders, or little discount from many holders. There has been a shift to the latter, as it may capture better discounts whilst minimizing litigation (e.g., Envision).

While creditors are often unhappy with LM, voluntary participation may be driven by a legitimate threat of a deal-away (where the debtor decides to transact with a third-party such as a private credit lender to the detriment of existing creditors). As one buy-side partner rhetorically asks, “Why are mean bankers and lawyers doing this to us? Because they can.” With loose credit documents and a crowded private credit market, there is a legitimate and punitive threat which has driven creditors—even long-only CLOs—to learn how to manage liability management.

Given the complexities of LME, some question whether LM is even worth it. Are the LMEs of today the bankruptcies of tomorrow? Bankers, lawyers, and buy-side offer starkly contrasting views:

• Bankers: Perhaps it comes as no surprise that for bankers, any LME that closes should be considered successful. If there’s no ensuing litigation, then the LME is highly successful. As one banker stated, “The goal of a LME is to buy time and extend runway… the buying of runway is a success in and of itself; if the company could not turn itself around with that runway, it is a business issue, not a LME failure.”

• Investors: In response to the bankers’ generous view of success, a buy-side partner visibly scrunched his eyebrows and retorted that elevating in the cap structure is not a great way to make money. Creditors want a recoverable business, and the quid pro quo is that if you do a LME once, docs are tightened after so it does not happen again. “For a credit investor, a LME is not always successful” (side-eye). 

• Lawyers: Of course, the lawyers took a moderating stance, stating that a successful LME means to avoid bankruptcy, or at least to ensure the LME does not take over in bankruptcy (e.g., Wheel Pros, which entirely skirted litigation in bankruptcy court over the prior double-dip). 

The panel ended noting upcoming trends in the space:

1. Litigation overhang continues to be a real issue, and in the next generation of LME, documentation will matter even more. As a certain lawyer who blew up the Incora case in February stated, “Documents matter. You should always ask, ‘What would someone like me [referring to himself as a lawyer] do to your deal?’”

2. The panel expects to continue seeing coercive LME with high participation rates as opposed to the bare minimum 51% participation. However, sometimes the discount spread for the company is not worth it, which may lead to a deal-away. However, note that near-dated maturities deter a deal-away, as creditors will respond to the threat with, “See you soon in bankruptcy.”

3. Credit documents remain loose, and LME will remain a fixture in the restructuring space as its technology continues to evolve. While 2022-2023 was more focused on discount capture, the panel expects to see a greater focus on maturity extension approaching 2027-2028 as 2021-2022 LBOs mature. 

4. Given the prominence of language issues (e.g. open market repurchase language in Serta), it will be 3-4 years before the next wave of language issues

5. While cooperation agreements have been on the rise as a tool for creditors to defend against creditor-on-creditor violence, cooperation agreements have yet to be litigated. Some may argue that cooperation agreements violate antitrust laws. The enforceability and viability of cooperation agreements will be an interesting topic in coming years.

6. While LM in private credit will likely never compare to levels in syndicated markets—due tighter documentation and the importance of preserving creditor relationships given the many repeat players on club deals—some expect to see an uptick in private credit LME (see Pluralsight). As the private credit industry grows, documentation will loosen, and public and private markets may continue to converge.

Keynote: The Evolution of LMEs with Josh Abramson

•  Josh Abramson: Partner, PJT Restructuring and Special Situations Group 

• Jeffrey D. Saferstein: Co-Chair of the Restructuring Department at Weil, Gotshal & Manges LLP

If there is anyone who can talk about LMEs for hours, it has to be the restructuring industry’s go-to LM banker, Josh Abramson. Abramson kicked off the panel recalling his junior days in 2015 working on the restructuring of Caesar’s Entertainment that set precedence for modern-day LM technologies: asset dropdowns, release of guarantees, and the first cooperation agreement (covered in our co-op write-up). Why have LMEs become so popular ever since? It’s a great product widely sold to sponsors and companies when they cannot access the capital markets. After the pandemic, LMEs have become gradually destigmatized, appealing to sponsors with highly levered portfolio companies from the rate hikes in 2022. With more supply of capital chasing a limited number of deals, companies could keep their credit docs loose.

Success in LMEs can be….

Subscribe to Pari Passu Premium to read the rest.