Protection through the org chart, not the docs

Lenders that took the keys during the pandemic are starting to hand them back at a profit. According to a report from PitchBook's Esther Luz, Tailored Brands filed on July 10th to return to the public markets with Silver Point, its owner since the 2020 restructuring, staying on as principal shareholder, and Strategic Value Partners and Sixth Street sold $743m of LATAM Airlines stock in February. So now lenders are papering this recovery route into the next cycle, negotiating for a smoother version of that ending before a single dollar is funded. The outcome at the backend is driving the contractual negotiation at the frontend.

Joshua Sturm at Proskauer describes clients "insisting on ownership structures that would facilitate the most efficient equitization process if that ever becomes necessary" - a step past closing liability management gaps in the covenants. The example from his practice: stacked holding companies above the borrower, so a lender can foreclose on the equity pledge at the top layer and still sell cleanly at the next. In his words, these are "structural protections that would show up on an org chart," and borrowers barely notice them "because it doesn't cost much to do."

The mechanics explain the approach: Strict foreclosure under Section 9-620 of the UCC swaps debt forgiveness for collateral on consent or non-objection - no court process and no public notice, with 20-day response windows. Done at the equity level, the lender's vehicle takes the pledged shares of a holding company and the operating business underneath changes hands undisturbed. Done at the asset level, the same exercise drags anti-assignment clauses and successor liability risk with it, among other complications. Proskauer's restructuring group is explicit in its published guidance: structure the loan parties at the outset to include at least one intermediate holding company between the sponsor vehicle and the operating business. The extra layer is what makes the remedy work - foreclose at the top, sell at the next level down.

The preparation goes past the org chart. Daniel Shamah at Debevoise describes lenders using LMEs "defensively to pre-wire different contingency plans that bypass bankruptcy," including rights to seat lender-appointed directors. Jennifer Harris at Dechert notes that distressed funds and direct lenders "may actively underwrite to an ownership scenario from inception" - and that banks and CLOs often can't hold equity, so the behavior concentrates in private credit.

On the lender side, the questions are structural: how many holding companies sit above the borrower, and where in the stack the equity pledge and guarantees are granted - with change of control provisions in key contracts and licenses checked against a top-layer foreclosure. On the borrower side, Sturm's cost observation is the point: provisions that cost nothing at closing attract no negotiating attention, and this one allocates the downside scenario. The LME blocker conversation of the past two years has been about closing the borrower's routes through the documents. This is its structural counterpart - the lender building its own route in, visible only on the org chart.

PitchBook's other finding, from its study of more than 50 bankruptcies, is the context for the preparation: creditor-owned businesses returned to bankruptcy where operating problems stayed unresolved, several within roughly two years of emergence. The org chart work decides how smoothly debt becomes equity. What happens after that depends on the business the lenders inherit.

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