Q2/2025 LMT volume surpasses 2024’s record pace as sponsors combine dropdown, uptier and double-dip structures in increasingly complex transactions that test documentation limits.
CreditSights reports that liability management transactions in 2025 are “on track to surpass even 2024,” despite predictions of a pullback following the Fifth Circuit’s Serta decision.¹ The evolution from single-structure LMTs to combination transactions — merging dropdowns, uptiers, and double-dips — demonstrates sponsor creativity in navigating post-Serta restrictions while extracting value from stressed capital structures.
The New LMT Playbook
Norton Rose Fulbright identifies two dominant species that “tend to dominate the LMT landscape”: dropdown and uptier transactions.² But 2025’s innovation lies in combination structures. CreditSights observes that Q4/23 and Q1/24 “witnessed several transactions that incorporated multiple LMT structures,” a trend accelerating through 2025.³
The Envision transaction exemplifies this evolution. KKR combined dropdown and uptier elements by designating valuable subsidiary assets as unrestricted, then executing an uptier exchange offer.⁴ This dual approach circumvents single-structure blockers while achieving similar economic outcomes.
American Bar Association analysis reveals administrative agents now face unprecedented complexity: “The ever-evolving world of LMTs, the double-dip transaction represents a market development that poses a unique set of challenges.”⁵ Double-dips create two separate claims against borrower assets through structural gymnastics that test documentation boundaries.
Post-Serta Workarounds Emerge
The Fifth Circuit’s ruling that Serta’s uptier violated pro rata sharing provisions hasn’t stopped uptiers — it’s forced innovation. LSTA data shows uptier blockers appear in 70.9% of new loans, while dropdown blockers remain at just 8.9%.⁶ This disparity creates opportunities for creative structuring.
Quinn Emanuel notes the Wesco/Incora case introduced the “domino effect” theory, where courts examine transaction sequences holistically rather than step-by-step.⁷ The court held that initial steps “had the effect” of subsequent lien stripping, even if each step appeared permissible in isolation.
Market response has been swift:
- Sacred rights expansion: Unanimous consent requirements now explicitly cover indirect subordination
- Open market definitions: Precise language defining what constitutes permissible non-pro rata purchases
- Collateral transfer restrictions: Caps on unrestricted subsidiary investments tightened from 3-4% to 1-2% of assets
AMC Entertainment’s Blueprint
AMC’s July 2024 dropdown transaction provides the template others follow.⁸ By transferring valuable collateral to unrestricted subsidiaries, then allowing participating noteholders to exchange for new first-lien debt backed by those assets, AMC achieved de facto priming without violating uptier restrictions.
This structure has become standard for 2025 transactions. The beauty lies in its technical compliance — no amendment violates sacred rights, yet minority lenders find themselves structurally subordinated.
Private Credit’s Natural Defenses
DailyDAC argues that direct lending’s structure provides “organic mitigation of LMTs”⁹. With private credit reaching $1.5 trillion globally by mid-2024, the bilateral nature of direct lending makes coercive exchanges more difficult.¹⁰
Key differences limiting LMTs in private credit:
- Relationship lending: Single or small lender groups reduce coordination challenges
- Customization: Bespoke documentation closes common loopholes
- Hold-to-maturity model: No secondary trading eliminates open market purchase arguments
- Aligned incentives: Direct lenders often hold multiple positions, reducing internecine warfare
Yet private credit isn’t immune. Norton Rose Fulbright warns that even bilateral facilities face LMT risk when documentation permits majority amendments.¹¹
Recovery Rate Disparities Widen
Fitch Ratings’ analysis of post-LMT bankruptcies reveals stark recovery differentials.¹² Participating “in-group” lenders average 65-75% recoveries while “out-group” lenders receive 15-25%. This 50-point spread incentivizes aggressive participation in LMTs despite legal uncertainty.
The Serta case exemplified these dynamics. The plan offered participating lenders significant recoveries while non-participants received “minimal recoveries.”¹³ Though the Fifth Circuit reversed on appeal, the bankruptcy confirmation created facts on the ground difficult to unwind.
Administrative Agent Dilemmas
Administrative agents occupy an impossible position. American Bar Association guidance emphasizes agents’ duties are “strictly mechanical and administrative,” yet LMT assessment requires substantive judgment.¹⁴
Agents increasingly require:
- Borrower certifications: Written confirmation that proposed actions comply with credit agreements
- Notice procedures: Advance warning to syndicate members of potential collateral releases
- Opinion letters: Third-party legal confirmation of permissibility
- Indemnification: Protection from litigation by excluded lenders
These protections slow LMT execution but don’t prevent determined sponsors from proceeding.
Documentation Arms Race Continues
The market has developed sophisticated blockers, but implementation remains inconsistent:
Uptier Blockers (70.9% adoption):
- Pro rata sharing as sacred right
- Open market purchase definitions
- Debt buyback restrictions
- Assignment limitations
Dropdown Blockers (8.9% adoption):
- Asset transfer caps
- Unrestricted subsidiary limitations
- Intellectual property protections
- Guarantee release restrictions
The disparity reflects lender priorities. Quinn Emanuel observes: “One could read the disparity…to indicate that, although lenders will not tolerate the risk of lien subordination, they may be more willing to accept the risk of a transfer of collateral.”¹⁵
- Crew’s Long Shadow
The 2017 J. Crew transaction remains the dropdown archetype.¹⁶ Using three investment baskets totaling $250 million, J. Crew transferred IP to unrestricted subsidiaries, then raised $340 million in new debt. The elegance lay in using existing covenant flexibility rather than requiring amendments.
2025 transactions follow this template but with enhanced sophistication:
- Multiple subsidiary tiers obscure asset location
- Synthetic structures achieve economic transfers without legal movement
- Foreign subsidiaries exploit cross-border complexity
Litigation Landscape Shifts
Norton Rose Fulbright notes that LMT litigation “can motivate borrowers to consider a more comprehensive restructuring.”¹⁷ The threat of protracted court battles pushes parties toward pre-negotiated bankruptcies where participating lenders control outcomes.
Key litigation trends:
- Forum shopping: Southern District of Texas remains favored despite criticism
- Expedited procedures: Courts fast-track LMT disputes to avoid limbo
- Equitable arguments: Minority lenders increasingly invoke good faith duties
- Criminal referrals: DOJ interest in potential fraudulent transfer claims
Market Implications
For the ecosystem, LMTs have become a fact of life requiring constant vigilance:
Sponsors: Must balance aggressive structuring against reputational risk. Repeat players face increasing resistance in subsequent transactions.
Direct Lenders: Documentation quality determines LMT vulnerability. The best defense remains tight drafting and limited syndication.
Banks: BSL market’s covenant-lite prevalence makes LMT defense nearly impossible. Focus shifts to avoiding distressed credits entirely.
Legal Advisors: Arms race creates lucrative mandates but also malpractice risk. Missing an LMT vulnerability can trigger eight-figure claims.
The Path Forward
CreditSights’ observation that 2025 volume exceeds 2024’s record despite Serta demonstrates market reality: LMTs are here to stay.¹⁸ Innovation will continue as long as distressed credits exist and documentation permits creativity.
The combination of dropdown, uptier, and double-dip structures in single transactions represents the current frontier. As blockers proliferate for individual structures, sponsors combine approaches to achieve desired outcomes.
Private credit’s growth offers partial protection through relationship lending and customized documentation. But as competition drives documentation convergence with BSL markets, private credit’s natural defenses erode.
For middle market participants, the message is clear: assume every stressed credit will attempt an LMT. Documentation must contemplate not just today’s structures but tomorrow’s innovations. The only certainty is that sponsors will continue pushing boundaries until courts or Congress definitively close the door—and perhaps even then.
References:
¹ CreditSights, “U.S. Liability Management Transactions: Quarterly Update Through Q2 2025,” July 17, 2025.
² Norton Rose Fulbright, “Liability management transactions: providing new capital,” 2025.
³ CreditSights, “Quarterly Update Through Q1 2024,” April 19, 2024.
⁴ CreditSights on Envision transaction, April 2024
⁵ American Bar Association, “LMTs: The Role of the Administrative Agent,” June 12, 2025.
⁶ Quinn Emanuel citing LSTA data, January 15, 2025.
⁷ Quinn Emanuel on Wesco/Incora, January 2025
⁸ Quinn Emanuel on AMC Entertainment, January 2025
⁹ DailyDAC, “Corporate Restructuring—LMTs, Private Credit,” April 21, 2025.
¹⁰ DailyDAC citing Bloomberg, April 2025
¹¹ Norton Rose Fulbright, 2025
¹² CreditSights citing Fitch Ratings analysis
¹³ Norton Rose Fulbright on Serta outcomes
¹⁴ American Bar Association, June 2025
¹⁵ Quinn Emanuel, January 2025
¹⁶ DailyDAC on J. Crew transaction
¹⁷ Norton Rose Fulbright, “Restructuring touchpoint,” 2023.
¹⁸ CreditSights, July 2025