Vol 23 (2026) - Issue 1

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Liability Management Exercises In Europe: What Do They Mean for Lenders? – Part Two

Synopsis
Part One, published in the previous edition, covered what LMEs are, documentary provisions and responses and their use in the US. This Part Two covers the use of LMEs in Europe and potential legal issues to be considered.
The UK and European markets are characterised by a number of differences which have, so far, led to fewer LMEs:
– Size – the European leveraged debt market is significantly smaller than the US market
– Typical documentation – cov-lite incurrence based loan agreements arrived later in Europe and English-law intercreditor agreements may disincentivise certain types of LMEs
– Structure of the creditor market and local culture – markets are smaller so that sponsors and creditors interact relatively more frequently and there fore may prefer less aggressive approaches
– Minority protections – English law does not have a general implied duty of good faith but a majority
exercising a contractual power must not be oppressive or unfair to the minority and fairness is part of the judicial considerations in a scheme of arrangement or restructuring plan
– Directors' duties – unlike the business judgment rule in the US, directors' duties in the UK and most
major European jurisdictions are stricter and less willing to defer to the directors' judgment, e.g. wrongful trading liability in the UK. In addition, there are a number of clawback risks where LMEs are implemented within a certain period before the debtor's insolvency and, as has previously not infrequently been the case in the US, the LME is not able to stave off insolvency proceedings
– Restructuring tools – English-law schemes of arrangement have long been used as tools to implement restructurings that are supported by at least 75% of the relevant creditors by value and a majority in number. In recent years, the UK introduced the restructuring plan (requiring only 75% by value), which allows for cross-class cramdown of dissenting stakeholders, and most major European jurisdictions have introduced similar tools, all inspired by the US Chapter 11 process. These permit the implementation of a restructuring with the protection of a court-supervised process.
The debtors in recent LMEs in Europe tend to be family rather than sponsor-owned, with at least a sizeable part of their debt being New York-law governed bonds and the LME appears to have often been used as a stick or a prelude to a holistic restructuring, a cooperation agreement among creditors has often been a response when a LME is mooted.