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:

As we’ve mentioned above, disqualified institutions can be added both before and after the closing date of a commitment letter. As a quick aside, let’s briefly clarify the difference between a commitment letter and the actual credit agreement. The commitment letter is a preliminary agreement given to lenders before the loan closing, and it details key terms. The commitment letter is binding in terms of commitment, but is not the final contract. The credit agreement, on the other hand, is the final contract that is fully negotiated. DQ lists can first appear in commitment letters, but the formal definition of a “Disqualified Institution” and the ways in which a borrower can update the DQ list after closing are only provided in the credit agreement. 

Importantly, you may have noticed that borrowers can name disqualified institutions at different times during the loan’s lifetime. Most credit agreements enable this updating mechanism through a clause that grants the borrower the right to add to its DQ list by delivering a written notice to the administrative agent [1]. DQ lists also typically do not expire, even in the event of default. This means that they remain in effect even during a restructuring process [3]. 

In the past, additions to the list have only applied to future disqualified institutions; additions did not traditionally unwind trades that have already been signed and settled. However, borrowers have recently started negotiating more aggressive and flexible DQ provisions that allow for retroactive disqualification, which would cancel and reverse a trade that has already happened. While this practice isn’t widespread, retroactive disqualification would enable a borrower to declare a previously approved lender disqualified, even after the trade has closed. If included in the DQ provision, this could force the retroactively DQ lender to unwind their position [2].

This retroactive unwinding usually happens immediately after the formerly qualified lender gets disqualified. In cases like this, lenders could be forced to unwind their position at a price that puts them at a significant loss, with the repurchase or reassignment typically done at the lowest of par, the original purchase price, or the current market price of the loan [2]. For example, let’s say a distressed-focused hedge fund acquires $10mm of term loans at 80 cents on the dollar. Then, the borrower designates the fund as disqualified and forces a takeout (repaying an existing lender’s position and removing that lender from the piece of debt) at the current trading price of 60 cents on the dollar. The lender is now forced into a $2mm loss, even if it had no prior knowledge that it would be retroactively disqualified. 

At the same time, borrowers have also expanded the scope of entities that get added to their list after closing. Under the LSTA DQ Structure, only competitors and affiliates should be added after the closing date, but borrowers have increasingly been including other entities, like distressed-focused hedge funds and activist investors, to their DQ lists as well. More on these two points later, but for now, the takeaway is that this flexible structure is intentional: it is meant to give borrowers the flexibility to respond to changing market conditions while also preserving some upfront lender visibility for restrictions regarding transfers. 

Administrative Agents

We briefly mentioned administrative (admin) agents when discussing how to update DQ lists, but let’s take some time to get a better understanding of what their role is and why they matter. You can think of the admin agent as an intermediary between the borrower and syndicate of lenders. Admin agents facilitate loan administration by tracking funding and repayments, centralizing communication between borrowers and lenders through distributing notices and lender requests, and ensuring loan transfers comply with DQ list provisions. To better understand how this last responsibility plays out in practice, let’s take a look at a hypothetical scenario in which lender XYZ Capital Management wants to buy Company ABC’s term loan on the secondary market: 

As part of the assignment process, XYZ submits transfer documentation to the admin agent. The agent checks if XYZ is on ABC’s DQ list. If XYZ appears on the list or can be reasonably identified as an affiliate, then the agent will reject the transfer. But as part of the process, the admin agent does not independently decide whether or not XYZ qualifies as a “competitor.” Admin agents are not legally responsible for enforcing judgments about whether an entity qualifies as a disqualified institution. Their role is not discretionary; the admin agent relies on the borrower’s written definitions in the credit agreement and does not independently conduct any research about XYZ or its ownership / operational structure [2].

The major implication here is that the burden of list accuracy lies solely on the borrower. If the admin agent approves a loan transfer where the lender turns out to have been on the DQ list, credit agreements usually have provisions to address the violation that absolve the admin agent of any liability, such as the one we see below:

Clauses like the one above explicitly state that the admin agent is not required to determine whether a lender is disqualified or not, nor does the agent face any liability for allowing an erroneous trade to settle. Such provisions could then include forcing the DQ lender to sell its position or restricting the DQ lender’s access to confidential information and voting rights [2]. 

Challenges and Applications in Liability Management

Challenges for Sellers and Buyers

While the LSTA recommends that admin agents post DQ lists on platforms accessible by existing lenders, these lists are often withheld or only provided upon request. Many sponsors also prefer to keep DQ lists private so as to not cause reputational harm or damage future business relationships [2]. As a result, transparency is the biggest risk to both the sell-side and buy-side because it results in settlement challenges, which are situations where a loan trade cannot be completed as intended and can result in legal and financial complications. 

For sellers like trading desks and institutional investors trying to sell their positions in a syndicated loan, lack of list transparency results in a lag that leaves sellers with out-of-date or incomplete information. Because lists are not widely distributed, sellers typically have to send multiple follow-ups to admin agents to get a response who may not even share the full list at the end of the exchange. Speed of transfers is important to stay competitive in the secondary market, so sellers will often proceed with trades before confirming the buyer’s eligibility. However, if the seller unknowingly transfers a loan to a DQ institution, the seller is still contractually obligated under LSTA guidelines to find alternative ways to settle the trade which results in the same economic outcome [4]. For example, instead of settling the trade through assignment of the loan, the two parties might have to pursue a total return swap or another derivative arrangement that’s allowed under the credit agreement. A total return swap (TRS) is a type of synthetic exposure to a loan where no type of ownership is transferred at all. In a TRS, the party receiving all economic benefits of a loan pays a fee to the actual loan holder, and no ownership is transferred. While both TRS and participations involve economic exposure without ownership, TRS involve more risk and regulatory complexity, whereas participations are structured directly through the loan market (meaning they are governed by official loan documentation) and are generally simpler.  

For buyers, transparency risk is amplified because they often have no visibility over DQ lists at all. Some credit agreements restrict admin agents from widely disseminating lists, allowing them to only confirm or deny a request from the existing lender if an entity is on the list. This becomes a major issue when assignees (the entity trying to buy the loan) must confirm that they meet all the requirements of assignment, including that they are not on the DQ list [1]. Additionally, the full loan transfer could take multiple weeks or months to close, and the approval of the borrowers is only required at closing. Thus, buyers could go through the entire due diligence and trade process only to be rejected at the very end of the process [2]. 

Also recall from before that, under most credit agreements, admin agents are legally protected from any repercussions if they mistakenly approve a trade to a DQ institution. This means that if an admin agent approves a trade with a DQ lender, the legal and financial consequences fall entirely on the buyer. Like we explained before, buyers in such cases could be forced to sell their positions at a loss and stripped of their rights to access financial and operational information [4]. These challenges combined not only bring disproportionate harm to the buyer, but also tighten liquidity in the secondary market as a whole. 

Strategic Use (Weaponization) in Liability Management

While DQ lists were originally designed to prevent competitors from gaining confidential information, sponsors have started to use DQ lists as a proactive lever in liability management. Sponsors do this by preemptively adding distressed investors to their DQ lists in order to keep lenders who could turn adversarial in a liability management scenario from influencing restructuring outcomes. Recently, we’ve seen sponsors exclude lenders in uptiers and dropdowns in cases like Serta (uptier exchange with an ad hoc group of lenders) and Byju’s (dropdown of IP assets). By limiting the pool of eligible lenders (sometimes retroactively), sponsors can execute liability management transactions only with supportive creditors, sidestepping the need for broad lender consent. This effectively shuts out non-participating lenders from acquiring additional debt or participating in negotiations at all [2]. 

If increased initial exclusion of lenders and lack of transparency weren’t enough of a roadblock to efficient and successful trades, borrowers have also paired DQ lists with other rights to further restrict lender pools:

One example of this is the expanded ability of borrowers to block lenders through the assignment process itself with broadened consent rights. As a reminder, consent rights are the borrower’s ability to approve or reject proposed assignments of a loan to a new lender. Traditionally, borrowers could only withhold consent on a “reasonable” basis, but recently credit agreements now explicitly allow borrowers to reject assignments based on the lender’s assignment strategy or lending history. For example, it is increasingly common to see language in credit agreements stating that it is not unreasonable to deny assignments to investors who focus on distressed debt or “special situations” [2]. 

As we’ll see shortly, another example of borrowers trying to curate favorable lending pools is the combination of open market purchase provisions with DQ lists to selectively reallocate debt to cooperative lenders. Open market purchases (OMP) are provisions that allow borrowers to buy back their own debt on a non-pro rata basis from certain lenders; the purpose of OMP provisions is to give borrowers the opportunity to reduce debt at a discount without offering the same terms to the entire syndicate. Because OMP provisions have historically been loosely defined in credit agreements, sponsors could combine them with DQ lists to facilitate more favorable liability management transactions [5].

Taken together, all of these trends are aimed at excluding distressed debt investors from acquiring loan positions. Because these investors are the natural buyers of discounted loans, borrowers effectively trap par holders (like CLOs) in illiquid positions with little flexibility. By excluding distressed investors, who are often the most sophisticated creditors with ample restructuring experience in liability management transactions, borrowers can more easily push through coercive deals without significant pushback [2]. 

Serta Case Study 

One of the most prominent examples of the weaponization of DQ lists is the case of Serta Simmons, a bedding company, and the company’s highly contentious uptier exchange. Without getting too much into the weeds, here is a brief summary of Serta’s situation prior to the emergence of the DQ list controversy: 

In 2020, Serta Simmons received competing out-of-court restructuring proposals from two creditor groups after facing liquidity pressure and a heavy debt load. The first group, including Apollo and Angelo Gordon, proposed a dropdown transaction where Serta’s IP assets would be transferred to an unrestricted subsidiary to serve as collateral for a discounted debt exchange. This structure offered some new money but would not yield any meaningful debt reduction. The other group, which we’ll call the priming term loan (PTL) lenders, was led by Eaton Vance and Invesco (both large asset management firms) and held a majority of Serta’s term loans. The PTL lenders proposed a more aggressive non-pro rata uptier exchange which involved amending the credit agreement to spin up new senior super-priority tranches above the existing 1L and 2L. The PTL lenders would then contribute $200mm of new money and exchange their current holdings into these new tranches at steep discounts. Serta ultimately went with the PTL lenders, leaving Apollo and Angelo Gordon, along with the other non-participating creditors, with severely subordinated positions; non-participating creditors effectively became 3L or 4L holders [6]. In anticipation of this outcome, Apollo had tried to acquire around $200mm of Serta’s 1L under Northstar, an affiliate [7]. Below is a chart summarizing the PTL lenders’ proposal, where the “Non-PTL Lenders” include Apollo and Angelo Gordon: 

The court’s initial approval of the uptier (which has recently been overturned) made Serta the first major bankruptcy to effectuate a non-pro rata uptier exchange in a widely syndicated loan. The case was heavily litigated, and among the core disputes was whether Serta’s use of DQ provisions to retroactively block Apollo’s loan purchases was enforceable. Apollo alleged that it had legally purchased nearly $200mm of the 1L TL before the uptier was finalized. The loan was purchased by NorthStar, an affiliate of Apollo, which was not explicitly stated on Serta’s DQ list. Apollo had received both verbal and written confirmation from UBS, the admin agent, and Serta had not objected to the trade within the typical 15-business-day window following the assignment notice. From Apollo’s perspective, these events constituted clear evidence of valid settlement and implicit borrower consent, especially because Apollo and its affiliates had traded in and out of Serta’s loans for two years after being removed from the company’s DQ list in 2016 [7]. 

Despite Apollo’s claims, Serta retroactively rejected Apollo’s assignments, asserting that NorthStar was an affiliate of DQ institution and therefore banned. This reversal effectively unwound the settled trades and excluded Apollo from participating in a transaction that substantially subordinated non-participating creditors. As a compromise, Apollo was allowed to keep half its position but the other half was rendered “null and void,” meaning the assignment was invalidated and Apollo would lose all associated rights to that portion of the debt. Serta’s weaponization of the DQ list in this scenario sparked controversy, raising concerns that Serta had used its DQ list not for competitive protection but as a tool to strategically eliminate dissenting lenders [7].

Clearlake’s 100-Lender Ban

In the same vein of strategic deployments of DQ lists, Clearlake Capital recently displayed one of the most aggressive uses of DQ provisions to date. Clearlake expanded the DQ list for its distressed company, Pretium Packaging (a manufacturer of plastic packaging), to nearly 100 lenders; usually, DQ lists include at most a few dozen lenders. This new DQ list was announced only a few weeks after an unnamed investor believed to be targeting a controlling loan-to-own position attempted to acquire a significant portion of Pretium’s debt. A loan-to-own strategy involves buying up discounted debt with the intent of taking control of the borrower through a restructuring process, often by converting debt into equity or dictating terms of reorganization. While not uncommon to exclude these opportunistic lenders, the sheer size and speed of Clearlake’s DQ list expansion made it uniquely aggressive [8]. 

Clearlake’s aggressive expansion of its DQ list is relatively uncommon for a few reasons. First, while borrowers have discretion to update their DQ lists, overly broad lists can severely restrict secondary market liquidity. When too many buyers are excluded, par holders like CLOs and traditional credit funds may find themselves unable to sell their positions, even if they want no part in a pending restructuring. This can leave the borrower with a passive creditor base that has little incentive or capacity to engage in liability management efforts. Second, constrained liquidity can backfire on the borrower: in a distressed scenario, companies often need to raise new money or negotiate complex deals with supportive lenders. If the debt is held by entities that neither want to inject capital nor participate constructively, the company’s restructuring options become more limited. The important lesson here is that market risks, rather than legal limitations, are the main constraint for large DQ lists becoming widespread.

The case of Serta, and the more recent example of Clearlake’s 100-lender blacklist, show how DQ lists have evolved from a narrow tool for protecting confidentiality into a powerful mechanism for borrowers to shape their creditor base, especially in distressed and liability management contexts. While they serve legitimate purposes, including safeguarding sensitive information and excluding disruptive lenders, their strategic deployment (especially when combined with broad consent rights, retroactive application, and open market purchase provisions) raises concerns about transparency, market distortion, and fairness. As these provisions grow more flexible and aggressive, lenders and investors must pay closer attention to DQ mechanics in credit agreements to protect their own interests. 

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