The following is a guest post from David Dragich, corporate restructuring lawyer and founder of The Dragich Law Firm, and Gene Kohut, an advisor and fiduciary in corporate restructuring proceedings and co-founder of Trust Street Advisors. Opinions are the authors’ own.
The numbers tell a stark story about the recent wave of liability management transactions. According to S&P Global Market Intelligence, among 38 loan liability management transactions executed by 35 companies between mid-2017 and August 2024, 37% of the companies ultimately filed for bankruptcy despite these efforts.
Of the remaining companies that avoided bankruptcy, only five (14%) successfully staved off a subsequent default and maintained ratings above CCC+. For CFOs facing debt challenges today, these statistics raise a critical question: Are liability management exercises (LMEs) truly a bridge to stability, or merely a costly detour to an inevitable restructuring?
The answer, as is often the case in corporate finance, lies in execution. While LMEs can provide valuable breathing room, the data increasingly suggests that without parallel operational restructuring efforts, they often serve only to delay — and potentially complicate — an eventual comprehensive restructuring. For companies facing debt challenges, understanding when and how to deploy LMEs effectively versus pursuing more comprehensive solutions has become a critical strategic decision.
The allure of liability management exercises
A liability management exercise is a transaction or series of transactions designed to modify a company’s debt obligations outside of a formal court-supervised restructuring. These exercises typically involve exchanging existing debt for new debt with different terms, transferring assets to secure new financing, or creating new structural priorities among creditors.
Common techniques include uptier exchanges (where certain creditors exchange their debt for new debt with higher priority), drop-down financing (where assets are transferred to subsidiaries to support new borrowing) and subsidiary transfers that create new collateral packages for lenders.
The appeal of these transactions is clear: they offer companies a path to address looming debt maturities without the disruption, stigma and cost of a comprehensive restructuring or bankruptcy filing. Through LMEs, companies can extend maturities, obtain covenant relief and preserve near-term liquidity — all while maintaining existing operations and avoiding the uncertainty of a more dramatic overhaul.
From a CFO’s perspective, the calculus often appears straightforward. An LME can buy time for market conditions to improve, for operational initiatives to bear fruit or for refinancing markets to become more favorable. The ability to negotiate with a targeted group of creditors, rather than undertaking a broader restructuring involving multiple stakeholder constituencies, can seem like a more manageable path forward. Moreover, the immediate costs of an LME, while substantial, typically pale in comparison to the perceived costs and risks of a comprehensive restructuring.
However, this tactical appeal often masks deeper strategic concerns. While liability management exercises can address immediate liquidity needs or near-term maturities, they rarely tackle the fundamental issues that created the company’s financial distress in the first place. The S&P data reveals a sobering reality: for many companies, LMEs serve not as a bridge to stability, but as the first step in a longer, more complex and ultimately more costly restructuring journey.
Hidden costs
While LMEs may appear to be a less costly alternative to comprehensive restructuring, the true costs — both immediate and long-term — can be substantial. The direct financial costs are significant: companies typically pay substantial fees to legal and financial advisors, while new debt issued in connection with LMEs often carries higher interest rates that reflect the company’s distressed status and the complex nature of the transaction.
But the more significant costs often lurk beneath the surface. The S&P data tells a striking story about the impact on creditor recoveries. Take Travelport, where recovery estimates for subordinated lenders plummeted from 75% to 0% following its priming loan transaction. Similar patterns emerged at J. Crew and Revlon, where recovery estimates dropped by 25 percentage points, while Party City saw a 30-point decline. These dramatic drops in recovery expectations reflect how LMEs can fundamentally reshape the capital structure, often to the detriment of existing stakeholders.
Operational constraints imposed by new debt terms can further hamper a company’s ability to execute business improvements. New covenants may restrict capital expenditures, limit operational flexibility or constrain strategic alternatives. Meanwhile, management teams often find themselves consumed by complex liability management negotiations rather than focusing on core business operations and necessary operational restructuring initiatives.
Perhaps most critically, LMEs can create Byzantine capital structures that make future restructuring efforts exponentially more complex. Each transaction adds new layers of structural subordination, intercreditor rights and competing claims that must be unraveled in any subsequent restructuring. This complexity not only increases the cost and duration of future restructuring efforts but can also limit the company’s strategic options when more comprehensive solutions become necessary.
Making LMEs work
While the data on LMEs may paint a discouraging picture, some companies have successfully used these transactions as part of a broader turnaround strategy. The key differentiator? Using the breathing room provided by an LME to implement meaningful operational changes rather than merely postponing inevitable financial challenges.
A successful liability management strategy requires parallel tracks of financial and operational restructuring. This means using the time bought through an LME to rationalize operations, reduce costs, improve working capital management, divest non-core assets and strengthen market position. The financial flexibility gained through an LME should be viewed not as an end, but as creating a window for implementing these crucial operational improvements.
Stakeholder engagement and transparency are equally critical to success. Companies that maintain open communication with their creditors about their operational turnaround plans, regularly report on progress and remain responsive to stakeholder concerns are more likely to maintain support through the restructuring process. This transparency can prove particularly valuable if additional creditor cooperation becomes necessary down the road.
The successful execution of this dual-track approach requires careful coordination between the CFO’s office and operational leadership. While financial and legal advisors focus on liability management execution, operational teams must simultaneously drive cost reduction initiatives, improve inventory management, enhance pricing strategies and address any underlying market challenges. Without this operational focus, even the most carefully crafted liability management exercise risks becoming merely a costly delay tactic.
As the S&P data demonstrates, liability management exercises are not a panacea for companies facing financial distress. Without corresponding operational improvements, they risk becoming expensive delays on the path to inevitable restructuring — often leaving companies with more complex capital structures and fewer options when that day of reckoning arrives.
However, for companies that approach LMEs as part of a comprehensive turnaround strategy, these transactions can provide valuable runway for implementing necessary operational changes. The key lies in viewing liability management not as a solution, but as one tool in a broader restructuring toolkit. CFOs must be clear-eyed about both the opportunities and limitations of these transactions, and ensure their organizations are prepared to make meaningful operational improvements during the breathing room an LME provides.
As companies navigate their way through financial challenges, the most successful paths forward will likely be those that balance financial engineering with fundamental business improvement. In the end, the success of any liability management exercise will be measured not by its immediate impact on the balance sheet, but by whether it provides a bridge to sustainable operational performance.
