Prepare for Liability Management Transactions in Private Credit

Liability management transactions are no longer a niche tactic—they’re the default playbook when liquidity tightens or maturities loom. Deals are moving from named “blockers” to broader, concept‑driven protections, and execution now turns on how documents coordinate economics, capacity, and process rather than any single covenant.

Why this and why now? A wave of refinancings, mixed credit conditions, and evolving case law over the last couple years has pushed sponsors to solve problems out of court while private lenders harden terms to avoid surprises.

If you touch private credit—on either side—you need a clear view of which mechanics still work, which protections actually bite, and how to position for the next round of exchanges.

How LMTs Work

LMTs use the flexibility in existing credit documents to change priority, move assets, or raise new money without going to court. Three patterns show up most:

• Uptier exchanges that create a new, senior tranche with a subset of lenders
• Drop‑downs that move valuable assets outside the collateral/guarantor net and finance them separately
• Double‑dips that lend at a non‑guarantor and pledge intercompany notes and guarantees to create multiple claims on the same collateral
• Most real transactions blend these tools to fit the timing, liquidity, and consent mechanics in the documents.

Sponsors use them to aid companies facing strain by extending maturities, adding liquidity, reducing near‑term cash interest, and protecting crown‑jewel assets. Companies lean on majority‑consent amendments, reclassification rights, and buyback or exchange mechanics that enable non‑pro rata outcomes.

Moving the Needle

• Majority‑consent amendments plus non‑pro rata exchanges can still support uptiers where affected‑lender consent isn’t hardwired.
• Cash‑to‑payment-in-kind toggles, grace‑period tweaks, and targeted collateral/guarantee releases create time and room to execute.
• Clear, front‑end buyback and exchange mechanics are displacing ambiguous “open market purchase” language to reduce litigation risk.
• Drop‑downs turn on the size and reusability of investment baskets and how unrestricted subsidiaries are defined and policed.
• Ask how much value can move, how fast, and can that capacity be reclassified or replenished.
• Double‑dips depend on allowing pari passu security for intercompany note pledges and broad guarantee capacity; targeted limits on duplicative claims can neutralize this tactic.

Documentation Shift

Early deals following the initial LMT waves chased headlines with one‑off fixes. In 2025, stronger syndicates took a comprehensive approach, blocking entire categories of related tactics. That means linking debt and lien limits, investment capacity, MFN economics, and voting/assignment architecture in a holistic manner.

Named blockers for specific LMT transactions still matter—affected‑lender voting for priming, limits on phantom releases, and tighter rules for transfers to unrestricted subsidiaries. In private credit, average documentation has remained more protective than BSLs, and covenant‑lite is near universal in BSLs but materially less common in private credit.

Here are key pressure points to negotiate:

• MFN terms: sunsets, carve‑outs, and whether “free‑and‑clear” tranches sidestep MFN. Roughly half of recent BSLs include an MFN sunset; many documents either let the sunset lapse or carve out the free‑and‑clear tranche.
• Incremental capacity: inside‑ vs. outside‑maturity headroom and any “one‑year cushion.” Inside‑maturity carve‑outs appear in roughly two‑thirds of BSLs, and one‑year outside‑maturity cushions are common.
• Reclassification and carry‑forward/back: whether unused baskets can be recycled to compound capacity.
• EBITDA add‑backs: caps, look‑forward periods, and synergy treatment that can quietly expand debt and investment room; uncapped add‑backs still appear in deals.

Process levers deserve equal attention: buybacks and exchanges, cash‑to‑PIK toggles, short default cures, and targeted releases that stop short of the “all or substantially all” line. Some equal‑treatment debates on the bond side are frequently cited in LMT disputes. Some documents explicitly allow non‑pro rata exchanges. To practice concept‑driven drafting, confine value transfers to a single, monitored channel and bar reclassification; limit pari passu security for intercompany notes to blunt double‑dips; require Dutch‑auction, cash‑only buybacks; and tailor assignment and voting rules for tight lender clubs.

Market Posture

Private credit has tightened terms faster than the broadly syndicated market, but variability persists. More deals require affected‑lender consent for priming, yet many still permit majority‑only amendments. A substantial share of outstanding index loans still allows majority‑only amendments.

MFN sunsets remain common, most often set at six months, and 75+ bps MFN cushions show up in a meaningful minority of deals. “Free‑and‑clear” incremental capacity is sizeable—often around 1.0x+ EBITDA. Many index loan borrowers can also avoid MFN on free‑and‑clear tranches due to sunsets or carve‑outs.

Inside‑maturity incremental carve‑outs appear in roughly two‑thirds of BSLs, while outside‑maturity carve‑outs are set at a one‑year cushion. J.Crew‑style and Chewy‑style blockers remain prevalent. Baseline capacity for day‑one baskets remains elevated by historical standards despite some recent pullback.

For borrowers, execution hinges on how much capacity you can reclassify and reuse—and how fast. For lenders, durability comes from coordinating the whole suite: debt and liens, investments and restricted payments, MFN, amendment thresholds, buybacks/exchanges, and assignments.

Practical Implications

Recent appellate and bankruptcy decisions have refined, not closed, LMT pathways. Draft with specificity—define “open market” mechanics, spell out participation and timing for exchanges, and make consent frameworks unambiguous.

Expect more concept‑driven protection packages—especially in larger or clubbed private deals—while the syndicated market evolves more slowly.

In new credits, focus negotiations on exchange/buyback mechanics; unrestricted subsidiary definitions and investment limits; MFN sunsets and carve‑outs; inside‑maturity bandwidth; and add‑back caps and timing.

When borrowers are in need of an amendment to an existing deal, organized lenders with a wish list in hand can improve on the documents as originally syndicated. As a result, analyzing existing portfolio loans, for weaknesses and potential improvements, can pay dividends.

What to Do

All parties should understand the risks and opportunities for LMT transactions in their loan documents and seek to adjust terms to meet their needs:

• Borrowers: Map your real, reclassifiable capacity across debt, liens, investments, and RP baskets; pre‑clear buyback/exchange mechanics; and line up timing and consent pathways before liquidity windows open.
• Lenders: Tie affected‑lender voting to any priming or subordination; cap reclassification and carry‑forwards; confine value transfers to a single monitored channel; and require clear, cash‑only, Dutch‑auction buybacks. Align voting and assignment terms for your lender group.

LMTs are here to stay. The winners will be the parties who negotiate documents as an integrated system—and execute quickly and cleanly when the market offers an opening.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Maria Cornilsen is partner at DLA Piper and an experienced leveraged finance lawyer advising banks, direct lenders, and financial institutions on US and European syndicated and private credit transactions.

Ryan J. Moreno is partner at DLA Piper and a seasoned finance attorney who represents banks and alternative lenders as lead arranger across complex capital-stack transactions.

Jamie Knox is partner at DLA Piper and a veteran finance lawyer with over two decades of experience advising borrowers and lenders on the full spectrum of corporate finance transactions.

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