Fox Legal Training

Part 1: The Evolving Landscape of Credit – Understanding the New Co-op Playbook

(Co-authored by Sabrina Fox, Fox Legal Training, and Celine Buttanshaw-Chan, PVTL Point)

The world of European credit is changing at a breakneck pace. With liability management exercises (LMEs) becoming more common and Co-operation Agreements (Co-ops) rapidly evolving, understanding the nuances of documentation is no longer just good practice – it's crucial for survival and success.

In this first part of a two-part blog series, we discuss these topics from the vantage point of a minority stakeholder, following on the engaging discussion we had on FLT’s Primary Market Education Series on May 6^th(replay available on the platform – click here).

It was a fascinating discussion, and this first part of the series focuses on the changing market dynamics and what to look for when one of these agreements makes its way into your email inbox.

The Ground is Shifting Under Our Feet

Celine, who until recently was a lawyer in private practice (where she predominately acted creditor side), brings a unique perspective in her current role as an investment professional at PVTL Point. PVTL Point, set up by Kunal Shah, invests across the full spectrum of European credit, from performing to distressed and uses a foundation of cashflow and legal downside protection analysis to optimise their position in the market. According to Celine, "it is certainly a very exciting time to be investing in European credit, especially given the recent structural shifts in the market."

The pace of change is relentless.

New Terminology & Technology: Legal interpretations and the "technology" within credit documents are constantly evolving. What was standard yesterday might be outdated today.

Beyond the Document's Four Corners: It's not just about reading the docs; the magic now lies in how you apply the covenants to real life. Basket sizes and asset movement restrictions are prime examples of terms that, if not properly scrutinized for the specific company, can lead to cautionary tales.

Opportunity in Proactivity: For creditors, this isn't just about defence. A proactive mindset and a thorough understanding of the documents can unlock significant opportunities.

As Sabrina recently commented in the FT, the old assumption that lenders will simply get repaid par at maturity? That’s no longer a given. The market is a living ecosystem; flexibility is introduced, smart people (on all sides – borrowers, sponsors, and lenders) find ways to use it, and new protective "technology" like blockers emerges.

Co-ops: From Defensive Huddle to Strategic Play

Co-ops themselves have undergone a significant transformation. Celine highlighted during our conversation how these agreements are being used in new ways, reflecting the market's evolution. It’s no longer just about "strength in numbers."

The Old School Co-op:

Aim: Gather as many creditors as possible for a unified negotiating front.

Outcome: Everyone gets the same deal.

Liquidity Impact: Generally neutral, as paper remains relatively liquid.

The Evolving Co-op Landscape:

The Majority Rules: Some Co-ops now see a simple majority getting a better deal, benefiting the largest creditors and preserving their optionality. This can create significant trading disparities between Co-op and non-Co-op paper.

The Hybrid Model: Everyone is invited, but it's accepted that the biggest players will likely drive the process. They might restrict themselves by choice, and in return for doing the heavy lifting, receive preferential treatment. Those creditors who are comfortable joining early may themselves receive incentives like "early bird fees" or even preferred terms post-restructuring.

"Suddenly you are seeing all this technology from restructuring support agreements, lockup agreements… and we're still calling it a Co-op," Celine noted. "It's so different from the original starting point of ‘this is a defensive play’."

Cracking the Co-op Code: What to Look For (Initially)

When a Co-op lands on your desk, what should you be scrutinizing? We advise treating it like a finance document. Here are the initial points to consider:

Context is Key:

Who is the sponsor?
Who are the known creditors?
What's the credit's history (multiple restructurings, etc.)?
What's the broader market environment (interest rates, appetite for investment)?
Consider potential recovery rates – timing is everything.

The Nitty-Gritty:

‍Commencement & Termination: When does it start? Is it when a certain number of creditors join the Co-op? The threshold for commencement can be an indicator of what's being planned. When does it end? Who can terminate it, and how? We have seen Co-ops lasting as longas 18 months to date. ‍
Amendment & Waivers: How is the Co-op amended? Are you part of the required consents? ‍
"Approved Transaction": This can be incredibly broad in what it allows but narrow in who proposes it (e.g., a specific law firm). You're signing up to be bound by something not yet fully defined.
‍Advisor Fees: Expect provisions for advisor fees to be paid as a condition.

The Give and Take:

‍What are you giving up? Signing a Co-op will result in you fettering yourself from other discussions, which can be the lifeblood for smaller, nimble players.‍
What are you getting in return? This is crucial. Is it just "strength in numbers," or are there tangible incentives?‍
Initial Party: Often gets the best terms for non ‘AHG’ members – fees, participation in new money, backstop opportunities. But you join early, without full knowledge.‍
Subsequent Party: Typically gets pro-rata economic treatment on existing documents but misses out on extras.‍
Transferability: Do the benefits received by the initial party transfer if you increase holdings or sell your position? This could impacts pricing.

In Part 2 of this series, we'll explore how Co-ops and the broader LME landscape can be viewed as an opportunity, particularly for minority lenders, discuss the concept of the "Omni-Blocker," and cover some critical questions from our audience. Stay tuned!

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