Another Market-Shifting Week for European Liability Management: Key Takeaways from Hunkemoller and Victoria plc

If your head has been spinning after the last week of developments in European liability management, you're certainly not alone. As someone who has dedicated my career to building covenant confidence in credit professionals, I can tell you that this past week ranks among the most significant we've seen since March of last year, when Altice France and Ardagh completely changed the liability management game in a single week.

Let me break down what happened and, more importantly, what it means for lenders moving forward.

Important Implications of the Hunkemoller Ruling

The judge in the Hunkemoller case handed down a ruling on motions to dismiss. While he dismissed plaintiff’s claim related to the implied covenant of good faith and fair dealing – a decision I'll circle back to – he did allow several contract violation claims to proceed, including one centered on the payment for consent covenant.

Here's why this matters: the payment for consent covenant typically prevents borrowers from engaging in non-pro rata deals with certain lenders in high yield bonds. It's a valuable protection, yet it's absent from the vast majority of deals across global markets. I remember analyzing deals between 2015 and 2018, watching as this covenant slowly disappeared from documentation.

The fact that the judge allowed this claim to proceed highlights just how important this covenant could be for lenders in other deals. However, I suspect the ultimate outcome may be different. In most consent solicitations where covenants are removed, the solicitation also requests waivers for any defaults that might result. My expectation is that the judge will ultimately reject the contract violation claim under the payment for consent covenant – unless it had been included in the sacred rights of the document, which would require 90% or above consent to amend in a high yield bond.

Victoria plc: A Masterclass in Strategic Timing

Meanwhile, Victoria plc executed their long-awaited up-tier transaction, and there are several fascinating elements to unpack here.

Initially, they had contemplated something more aggressive but took time to reconsider their options – possibly because they didn't want to end up in court like Hunkemoller. This shows how the market changes in real-time, with participants adjusting their strategies based on ongoing legal developments.

Victoria plc ultimately secured a sufficient majority of their 2026 notes to vote in favor of the up-tier. But here's the important detail that every lender should pay attention to: the 2026 notes and 2028 notes voted as a single class. This meant that even though the transaction was detrimental to the 2028 noteholders, they couldn't block it from proceeding.

This is a valuable information for lenders. If there are significant differences between two tranches of debt, they should not be in the same voting series. Typically, you might find two different senior notes issued under the same offering memorandum, but they should be issued under separate indentures when their interests diverge – which they often do due to different security arrangements, documentation, or other factors.

If the 2028 notes had been issued under a separate indenture in this case, they would have required the same level of consent to approve the transaction as the 2026 indenture, and the deal likely wouldn't have gone through.

The Rise of Protective "Blockers"

One encouraging development in LMEs is the emergence of certain protective provisions in new deals or those coming out of liability management exercises. We're seeing a range of blockers that could prevent or make more difficult the types of liability management transactions we saw in both Victoria plc and Hunkemoller. While these aren't appearing in many deals yet (they're still a minority), I strongly recommend that lenders insist on their inclusion (see my recent FT article where I argued for the omni-blocker).

However – and this is important – all of these protections should be included in the sacred rights of a deal. What we're seeing now that'different from the Ardagh and Altice France situations is that once you achieve a majority consent, all bets are off. You can push through amendments that fundamentally alter the protections in the documentation. Including these provisions in sacred rights for high yield bonds would mean issuers need 90% or above consent—a much higher bar.

The European LME Landscape is Changing

Victoria plc also demonstrates what's possible in the European liability management space. While Europe has traditionally seen fewer LMEs than the United States, this transaction shows there's growing willingness within the borrower community to conduct these exercises, often in conjunction with proactive lenders looking to buy in low and secure better recovery and security positions.

This makes it more important than ever for lenders to educate themselves about their documentation and understand what protections they can and should demand to guard against the worst excesses of the covenant flexibility era.

The Limits of Good Faith Arguments in New York Law

Finally, let's return to that dismissed claim in the Hunkemoller case. The judge's rejection of the implied covenant of good faith and fair dealing argument sends a clear signal to anyone dealing with New York law-governed bonds: when parties come together and put their intentions into a contract – whether that's protections for lenders or flexibilities for borrowers – and the borrower later takes advantage of those bargained-for flexibilities, that's not a violation of this principle.

The borrower is simply using their contractual rights as agreed upon. This makes it absolutely necessary for lenders to understand exactly what their covenants say and what protections they actually provide.

Looking Forward

These developments underscore a fundamental shift in the liability management landscape. The days of relying on implied protections or assuming certain industry standards will hold are over. Lenders need to be proactive, detailed, and strategic in their documentation requirements.

The message is clear: know your covenants, insist on proper protections, and make sure those protections are placed where they can't be easily amended away. The market has shown us what's possible when these safeguards aren't in place.

As these situations continue to develop, staying informed and understanding the nuances of liability management will be more important than ever. The stakes have never been higher, and the need for covenant confidence has never been more apparent.

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