Rise of Liability Management Exercises

Liability management exercises (LMEs) have become the preferred method for borrowers to restructure debts outside of bankruptcy, now outnumbering traditional bankruptcies. These exercises are appealing due to the potential to avoid the lengthy and costly Chapter 11 process, which often results in a complete loss of equity for sponsors. In situations where borrowers engage in LMEs, it preserves optionality for stakeholders, allowing companies to work through financial distress while avoiding immediate loss crystallization. This flexibility can help maintain customer relationships and provide much-needed time for recovery, albeit with inherent risks since about 50% of LMEs ultimately lead to bankruptcy filings.