Welcome to the 136th Pari Passu Newsletter.  

As we all know, over the past few years, liability management transactions like uptiers and dropdowns have challenged the limits of traditional lender protections. The disqualified lender list, a once-overlooked element of credit agreements, has emerged as a tactical tool to enable this shift to more aggressive restructuring solutions.

Originally intended to block competitors from accessing confidential information, these lists are now being deployed by sponsors to exclude hostile creditors from influencing restructuring outcomes. To explore how, today we’ll learn about the legal foundations, mechanics, challenges and applications of disqualified lender lists in modern credit agreements.   

Don't Get Left Behind: The LME Market's Next Seismic Shift is Coming

The world of LMEs is ablaze with pivotal legal battles, hot on the heels of the game-changing "Serta" ruling. That landmark decision rattled the market, leaving restructuring and distressed professionals wondering: what will trigger the next seismic shift, and how will it impact your strategy?

Join 9fin for a webinar on Tuesday, June 24 at 3pm ET. A panel of leading experts will dive into active LME litigation of 2025, identifying key trends and provisions that could solidify as valid workarounds or be permanently excluded from the borrower and majority lender playbook.

This is your opportunity to gain clarity on critical ambiguities: no-action clauses, fraudulent transfer claims, sacred rights, and the implied covenant of good faith. Understand risks and opportunities that may reshape market practices.

An Overview of DQ Lists

Disqualified lender (DQ) lists are lists created by borrowers to preclude certain entities from becoming lenders under a credit agreement. In 2014, the Loan Syndications and Trading Association (LSTA) established the LSTA DQ Structure, a standardized way to document DQ lists to support borrower protections while also minimizing disruptions to secondary market liquidity. Entities on the DQ list are prohibited from becoming lenders through assignment (direct transfer of ownership, including voting rights) or participation (only transfers economic rights like interest payments, but the original lender retains legal title and control). DQ lists apply in both the syndication (the initial distribution of a loan to a group of lenders) and secondary trading of loans (the buying and selling of existing loan interests between investors), and the length of these lists varies greatly [1]. 

There are two main goals that DQ lists aim to achieve through granting borrowers a degree of control over their lender base: protect sensitive business information and exclude predatory lenders [1]. 

First, DQ lists are designed to safeguard confidential business information, which is especially critical for sponsors seeking to protect sensitive details about their portcos from competitors. Lender rights often include access to financial reports and other operational details; by excluding direct competitors and their affiliates (entities under control by another entity), borrowers can limit the risk of confidential information slipping into the hands of rivals. For instance, if a sponsor owns a competitor of the borrower as one of its portcos, the borrower would likely add the sponsor and its affiliated credit arms to the DQ list to prevent them from accessing confidential borrower information. In contrast, pure-play credit funds that don’t have equity ownership over industry competitors or other strategic incentives are usually excluded from DQ lists. 

Second, DQ lists allow borrowers to exclude adversarial or opportunistic lenders. For example, if a company becomes distressed, the borrower would want to block distressed-focused funds or activist investors from gaining leverage that would benefit them in future negotiations, as these funds often pursue strategies that prioritize their own recoveries over the long-term health of the company.

To illustrate these two goals, let’s imagine a scenario where a sponsor-backed borrower, Company ABC, specializes in widgets. Company ABC operates in a highly competitive industry, and many of its direct competitors are also backed by large firms with lending arms that regularly invest in syndicated loans. To protect its position, ABC puts all the major credit funds affiliated with rival sponsors on its DQ list. Later, let’s say Company ABC experiences financial strain due to global supply chain disruptions and a sudden drop in demand caused by a global pandemic. A prominent distressed fund tries to buy portions of ABC’s first lien term loan in the secondary market in an attempt to gain influence in an imminent restructuring. However, because ABC had preemptively included these funds in its DQ list, the trade gets rejected during the assignment approval process. Once the distressed fund submits transfer documentation to the admin agent to acquire the loan, the agent checks the DQ list to see if the fund or its affiliates are on it. After discovering the distressed fund is a DQ lender, the admin agent blocks the trade before it can settle; the legal title to the loan and associated rights never change hands. As a result, the fund is prevented from owning ABC’s debt and, therefore, is excluded from both accessing confidential borrower information and gaining leverage in future liability management negotiations. 

Legal Foundations

Now that we’ve established what DQ lists are and why they matter, it’s important to understand the legal framework that makes them enforceable. The concept of making a list to restrict certain lenders from holding a company’s debt seems simple, but as with many restructuring concepts, the effectiveness of DQ lists lies in the details. Their scope and enforceability depend on how they’re drafted into credit agreements, and understanding these intricacies is necessary to understanding how DQ lists function in practice. 

Definition and Scope

According to the LSTA DQ Structure, the term “Disqualified Institution” includes three categories [1]:

1. Named Entities at Signing: Before a loan closes and the credit agreement is signed, lenders formally commit to provide financing by signing a commitment letter. This first category includes all entities that the borrower identifies as a disqualified entity before this letter is signed; these institutions are named at deal inception. 

2. Designated Competitors: Designated Competitors are any entities or their subsidiaries that are direct competitors of the borrower. For example, if the borrower is a manufacturer of car parts, it may designate other major players in the industry as disqualified institutions. These institutions can be added to the DQ list later on after the closing date of the commitment letter, and the borrower does this by giving a written letter to the administrative agent (more on this later). 

3. Affiliates of (1) and (2): Because disqualified institutions could, in theory, use a related entity to obtain the advantages of becoming a lender, this third category includes any affiliates of a disqualified institution. Affiliates can either be explicitly named by the borrower or be reasonably identified by name similarity. For example, if Company ABC names XYZ Capital Management as a disqualified institution, then XYZ Fund would also be excluded because it is clearly linked to the named entity, XYZ Capital Management. Here, there is also a carveout (exception) for Bona Fide Debt Funds, which are funds that act purely as passive financial investors. Bona Fide Debt Funds are only interested in financial returns, not in gaining confidential business information or taking control over the borrower; they are carved out to preserve market liquidity. This carveout is not automatic because whether a fund qualifies as a Bona Fide Debt Fund usually depends on how the credit agreement defines the term. Thus, even if a fund is affiliated with a DQ lender, it may still be allowed to acquire a position in the loan if it can show that it operates independently. 

Mechanics of DQ Provisions

DQ lists, which are a part of DQ provisions, typically appear in the first section of credit agreements, which cover definitions and core terms. Below is an example of the language used in DQ provisions, taken from Article I of Instructure Holdings Inc.’s (an edtech platform) credit agreement:

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