December 26, 2023 - In April this year we recirculated an LSTA Market Advisory first published in 2021 that outlined certain “drafting fixes” for those lenders looking to protect themselves from different types of liability management transactions (LMTs). In July, we updated and expanded that market advisory to take account of recent market developments. Now we have updated that Market Advisory. In the latest version, which was published on December 20, 2023, we summarize the key features of the main types of LMTs that have been prevalent in our market — the drop-down financing and the uptiering transaction – as well as some recent structures commonly referred to by market participants generically as “double dip” financings. Here, a creditor has the benefit of a guarantee for a primary obligation of a borrower, and the primary obligor – against which the creditor also has a claim – has its own intercompany claim against that guarantor as well. The direct guarantee claim and intercompany claim each represent an independent source of potential recovery from the borrower. In bankruptcy, creditors and distressed investors sometimes identify these structures as potential opportunities for “double dip” recoveries if the debt in question is in a class of claims likely to be paid less than in full. Please note that the concept of a double-dip or multiple claims is not new or unique to liability management transactions.
We then match the structures to the relevant credit agreement provisions; set out possible “documentation fixes” (i.e., broadly drafted “riders” which can be included in credit agreements to limit the ability to effect a particular LMT); and provide a credit agreement “Documentation Checklist”.
We urge our members seeking to protect themselves from LMTs to review the Advisory and note the drafting fixes included here and the Checklist in the Annex.