The Evolution of Liability Management: Navigating Europe’s New Restructuring Landscape
September 12, 2025
FLT’s recent Knowledge Series webinar with Shan Qureshi from Octus Intelligence illustration how dramatically the liability management and restructuring landscape has evolved in the past decade – and why understanding legal documentation has never been more critical.
From CVAs to LMEs: A Decade of Innovation
When Shan started covering restructurings nearly a decade ago, we were seeing creative uses of Company Voluntary Arrangements (CVAs) and schemes of arrangement. The real game-changer came in 2020 with the restructuring plan under Part 26A, introducing cross-class cram down – the ability to force through a restructuring even when some creditor classes vote against it.
But things started to get controversial as we witnessed the rise of Liability Management Exercises (LMEs).
What LMEs Really Mean Today
While every restructuring is technically a “liability management exercise,” the term has taken on a very specific meaning. Today’s LMEs are aggressive transactions that use existing covenant flexibility to benefit some creditors at the expense of others – what the market calls “creditor on creditor violence.” The key difference? These happen within existing documentation, so no court process required.
Selecta: A Masterclass in Legal Engineering
The Selecta case perfectly illustrates these new power dynamics. What started with a bog-standard Dutch restructuring turned out to be something much more sophisticated.
After a standard share pledge enforcement in stage one, stage two presented bondholders with a “Hobson's choice”: stay in your existing position with a 15% haircut but strong covenant protection, or get paid at par but accept debt with only a 50% consent threshold for sacred amendments.
Here’s the kicker – market standard consent thresholds are typically 90%. But the ad hoc creditor group controlling 66-67% of the debt had a cooperation agreement. As Shan noted, it’s the legal equivalent of saying “This is our table. You can't sit with us.”
The minority creditors are now launching legal claims.
The Rise of Cooperation Agreements
These contractual arrangements between creditors have migrated from the US to Europe and are changing everything. The big question: are they potentially anti-competitive? The argument is compelling – you’re essentially telling the borrower they can’t use the flexibility they bargained for in the primary market.
This hasn't been tested in English courts yet, but Selecta’s recent weaponization of co-ops could put them in the legal spotlight soon and the outcome could reshape the entire market.
Why Director’s Duties Aren’t Your Safety Net
Many assume director’s duties provide strong protection against aggressive LMEs, but the reality is more nuanced. While directors must consider creditor interests once insolvency becomes probable, this is a “blunt tool.” Director’s duties run to the company, not individual lenders, and enforcement is typically limited to liquidators and administrators.
Formal Restructuring Challenges
The Part 26A case law has become genuinely messy, with competing judgments and unclear boundaries. Thames Water – a company with zero debt at 1990 privatization that recently needed £3 billion for a short-term fix – shows how judicial discretion drives outcomes despite significant opposition.
Meanwhile, Petrofac pushed boundaries by attempting to cram down contingent liabilities, essentially zeroing out potential future claims before they crystallize. But courts are pushing back, creating genuine uncertainty for advisors and clients.
Brexit’s Ongoing Impact
We recently had a stark reminder of Brexit consequences: a German court refused to recognize English court actions regarding debt restructuring. Without EU regulations, European courts have no obligation to recognize English decisions, adding complexity and cost to cross-border restructurings.
Preparing for the New Reality
The message is clear: go back to basics, but with sophisticated understanding of what “basics” means today.
For lenders, this means rigorous document due diligence. You need to understand baskets, transfer mechanics, voting thresholds, and enforcement triggers. Most importantly, you need to know who else is in the playground with you.
If you’re buying distressed debt with aggressive sponsors and hedge funds in the mix, make sure you’re either part of the cooperation agreement or have enough capital to participate in new money facilities.
The Road Ahead
I see several key trends developing. Consent thresholds are under pressure – we've moved from 90% to 75% to 66%, and now 50% in Selecta. Cooperation agreements are filling gaps left by loose covenant protection while being weaponized against non-participants.
The formal restructuring tools face increasing challenges, potentially driving more activity toward out-of-court solutions with different litigation risks.
Final Thoughts
We’re in an environment where struggling businesses can survive longer than ever before. The loss of maintenance covenants and increased documentary flexibility means companies can delay reckonings for years. Sometimes this extra rope helps fix real problems; other times it just burns through more creditor value.
The one constant is that knowledge remains your best defense. Understanding documentation isn’t just helpful – it’s absolutely essential. It leads to better conversations with lawyers, better covenant analysis understanding, and better positioning for whatever comes next.
The market has evolved dramatically and won’t go backward. The flexibility isn’t disappearing from new documentation, and creativity in using that flexibility continues expanding. Your best strategy? Master the fundamentals, know your counterparts, and stay ahead of the curve.
Because in this new world of liability management, the only certainty is change – and players who understand the rules have the best chance of winning.