2025 – The year of the "Document Arms Race"

2025 – The year of the "Document Arms Race"

2025 marked a pivotal shift in leveraged finance, with borrowers aggressively testing liability management exercises (LMEs), courts issuing landmark rulings on uptier transactions, and lenders mainstreaming protective "blockers" in documentation. The year finished with a bang as Altice USA followed Selecta’s lead in taking legal action against cooperation agreements – setting up 2026 to be a transformative year for the leveraged finance market.

Credit professionals faced heightened risks as cov-lite structures masked off-balance sheet liabilities, demanding deeper diligence beyond standard credit analysis. This evolution underscores the need for proactive covenant protections in primary deals amid a refinancing-heavy market – and further proved the necessity and value of robust documentation analysis skills.

Blockers & Bifurcation

By mid-2025, leveraged loans in both EMEA and the US incorporated J.Crew-style blockers in a growing proportion of transactions, with Chewy protections and anti-Serta provisions also becoming more mainstream.

Meanwhile, a market bifurcation began to appear, as post-restructuring debt featured omni-blockers and higher consent thresholds for key actions that will make it harder for borrowers to leverage docs against lenders the next time around.

We discussed these trends with Shan Qureshi of Octus on the Knowledge Series, replay available here, and will continue the conversation on January 13th at 4pm, register here.

Key Court Rulings

On the very last day of 2024, the Fifth Circuit's Serta decision reversed the lower court’s finding on the applicability of the "open market purchase" exception for its non-pro rata uptier exchange.

Conversely, New York's Appellate Division upheld Mitel's uptier, ruling that the transactions fell under a relevant – and specifically drafted – provision in the contract. We discussed these and other trends with Jones Day partner, Lewis Grimm, during our Knowledge Series webinar available here.

In September, a Texas district court indicated that it would reverse the bankruptcy ruling on Wesco/Incora’s 2022 lien-subordinating exchange – declaring it "perfectly proper and appropriate."

2026 will see key decisions in several other ongoing cases, including Hunkemöller, Selecta and Altice USA (Optimum), discussed below, and jurisprudence promises to continue to shape LME structures going forward.

First Brands Collapse

First Brands filed Chapter 11 on September 28, 2025, exposing billions in inventory finance, factoring, and SPE debt that had escaped most lenders’ notice until the story was broken by Rob Smith, Corporate Finance Editor for the Financial Times.

A special committee investigated irregularities, leading to CEO Patrick James's resignation on October 13. The battle rages on in bankruptcy court.

We worked with Rob to create a new course guiding credit analysts on the necessary steps to avoid becoming enmeshed in similar situations in 2026. You can check out Following the Money here.

Covenant Evolution & Private Credit PIK

Refinancings surged, and some borrowers in the private credit space replaced leverage tests with springing EBITDA/liquidity covenants and swapped from cash interest to PIK. Private credit accelerated blocker adoption through the year, alongside greater cov-lite exposure.

We’ll explore more private credit trends during our part 2 of our Knowledge Series with Jeanine Arnold, Head of EMEA Leveraged Finance at Moody’s. If you missed part 1, the replay is available here.

In the high yield and broadly syndicated markets, baskets and calculation mechanics expanded. The convergence between instruments continued the race to the bottom on lender protections, with loan concepts continuing to feature in bonds and vice versa.

Coops in the Line of Fire

For the first time, we saw the antitrust validity of cooperation agreements brought before the courts.

Minority bondholders sued Selecta Group and a group of creditors in New York federal court in October. They claim that an April 2025 cooperation agreement violated antitrust laws by creating a collusive bloc that excluded them from restructuring benefits, enabling vote-buying and superior "first-out" notes for participants. It was the first time a cooperation agreement was used aggressively, rather than defensively.

This action was followed the next month by Altice USA (Optimum), which sued Apollo, Ares, BlackRock, and others, alleging their cooperation pact blocking a $26 billion refinancing forms an illegal cartel under the Sherman Act. The company argues it enforces group boycotts, inflating costs; defendants counter it shields against borrower tactics amid Optimum's distress.

Should the courts decide against cooperation agreements in one or both of these cases, lenders could lose a critical tool in the armoury for defending against LMEs. We discussed the importance of these agreements – particularly to minority lenders – on the Knowledge Series with Celine Buttanshaw-Chan – the replay is available here.

Covenant Analysis Skills Become Essential

We spoke with Labib Choudhury, Director on the Leveraged Finance team at Rabobank, and Susan Baker, Senior Portfolio Manager at PSPRS, who both commented on the essential nature of legal analysis skills in today’s rapidly evolving markets. Labib noted during our Knowledge Series discussion that “[l]egal fluency, especially in covenants and documentation, is the crucial link that often makes or breaks a deal.” He also provided tips for recent grads and junior analysts who want to stand out in their careers. You can watch the replay here. Susan commented that “[s]pecifically with the rise of LMEs in the headlines, loan covenants just seemed like a good target for further learning. [FLT] seemed highly relevant to my work.” We

discussed the challenges facing LPs allocating to the private credit space on our Knowledge Series webinar, replay available here.

We plan to return in 2026 with a host of new ways to facilitate legal knowledge acquisition, designed especially for busy credit professionals. With our latest course added to the platform, we now have 15 on-demand courses available. Alongside our AI Covenant Tutor, it has never been easier to learn how to analyze legal documents – we can’t wait to continue supporting our clients and the wider market in 2026!

In the meantime, enjoy the holidays – all of us at FLT wish you and yours a magical festive season!

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