Our Legal Insights Blog

Liability management exercises are no longer the exception. They are a standard part of the sponsor toolkit, and the documentation written just a few years ago is now allowing sponsors and their lawyers to restructure thebalance sheet within the four corners of a credit agreement. In tech and software, that risk is more dire than in any other sector, because the value that moves is the entire value of the business.

We can no longer assume that funds will be repaid to lenders at par. That was the opening message to the room as we filmed our newest course at Fox Legal Training: A Framework for Analyzing Liability Management Exercises, now available on the FLT platform.

Last week, I attended Bloomberg’s fourth annual CLO Summit in London. The conversation was more measured than the headlines have been suggesting. 2025 was a record year for new issuance, resets, and refinancings. Investor demand was strong across the capital stack, and CLOs continued to function as the largest buyer of leveraged loans in Europe. The structure held up, even with geopolitical noise running in the background.

Something is shifting in the markets. Inflation expectations hit 5.2% last week in the US, the highest since March 2023. Three weeks ago the bond market was pricing in rate cuts. Now the probability of a Fed rate hike by year end (24.6%) is more than three times the probability of a cut (7.5%). Fed fund futures have pushed the next expected cut all the way out to October 2027. That’s the picture in America, but if you think Europe is insulated, think again.

Last week, I hosted a breakfast roundtable in Paris with a group of European credit professionals. The room included CLO managers, high yield portfolio managers, direct lenders, distressed investors and stressed credit analysts. What they had in common was that they are all grappling with documentation risk in one way or another.

During our roundtable discussion in Los Angeles, our guests – representing investors, advisors, and covenant specialists – discussed how distressed investing has changed, particularly in the era of liability management exercises (LMEs), co-op agreements, and increasingly flexible documentation. The conversation was so in-depth we were only able to take photos after it was already over!

Over breakfast and coffee, a room full of lenders, investors, and credit professionals gathered to talk about something that has quietly reshaped European leveraged finance over the last decade: documentation risk – and the implications of borrowers actually using the flexibility they’ve negotiated. What followed was not a technical training session or a legal lecture. It was a candid, experience‑driven conversation about how we got here, what has changed in practice, and what lenders can realistically do next.

Asset Sale covenants are viewed as protective: if a borrower sells assets, lenders expect either reinvestment in the business or debt repayment. In theory, these provisions preserve credit quality by preventing value leakage. In practice, however, modern drafting frequently gives borrowers far more flexibility than investors appreciate – especially in stressed situations.