Liability Management Exercises (LMEs)

What is an LME?

The term LME can have various meanings. For the purposes of this subtopic: (i) LMEs include liability management transactions (LMTs) (ii) LMEs refers to a borrower using flexibility in the finance documents (sometimes unintentionally granted by the lenders) to adjust its capital structure, thereby accessing additional and/or cheaper debt or reducing leverage, and (iii) LMEs do not involve any formal or court driven restructuring techniques (eg Part 26A restructuring plans (RPs) or Part 26 Schemes of Arrangement (schemes)) and so are a form of ‘out of court restructuring’ process.

Typically, the debtor and a small group of existing (or new) lenders/bondholders/noteholders will work together to elevate or improve the position of those participating creditors, often to the detriment or dilution of non-participants (ie a non pro rata deal). Essentially, LMEs involve a tension between freedom of contract (the argument run by the debtor company and participating creditors) and the equitable treatment of the non-participating creditors.

LMEs are generally used to give the debtor company breathing space and can help with liquidity issues which may have been caused by various factors including (among