What’s a Lender to Do? A Review of Some 2020 Cases on “Liability Management Exercises” and the Covenants to Address Them

January 21, 2021

To say a lot happened in 2020, just doesn’t somehow seem to capture the significance of all that has occurred. But while the magnitude of public health, economic and political issues have made this past year so unique, even in the world of credit documents there has been a conspicuous volume of activity.

Otterbourg partners, David Morse and Valerie Mason, led a program for the Association of Commercial Finance Attorneys on January 21, 2021, exploring the headline cases in 2020 concerning "liability management exercises."

We first heard about “liability management exercises” by sponsor owned borrowers when we looked at J. Crew, PetSmart and Neiman Marcus—transactions that led to disputes and litigation among lenders and borrowers and among lenders themselves. These are the transactions that borrowers, and particularly sponsors, use within the framework of the covenants in the credit agreements in order to reduce their risk and maximize a potential recovery in distressed circumstances while increasing the risks to the lenders.

2020 brought a new crop of transactions by borrowers, and particularly sponsors, using the framework of the covenants in the credit agreements to reduce the sponsor’s risk for a recovery from a troubled investment.  These cases include Travelport, Revlon and Cirque de Soleil for "drop down financings" and Serta, Boardriders and Trimark for "uptiering".  

After the in-depth review of the cases, David and Valerie explored the elements of the covenants in credit agreements that lenders need to think about to understand how these circumstances may arise and how to address them.

The material from the program may be seen here.