As business leaders consider liability management exercises (LMEs), which are an increasingly popular method, it’s critical to explore the efficacy and limits of out-of-court debt restructuring.
The liability management exercise is an umbrella term for an out-of-court method that restructures a distressed company’s debt obligations. LMEs have become the default tool of choice for overleveraged borrowers and their private equity sponsors, with their use exploding in recent years.(1) Because LMEs are trending as go-to tactic, it’s important to consider whether an LME can reliably support a credible operational turnaround.
At its core, an LME is any transaction, or series of transactions, that modifies a company’s debt obligations outside of a formal court-supervised insolvency process. Whether structured as drop-down transactions, up-tier exchanges, distressed exchanges, or amend-and-extend transactions, the legal mechanics differ, but the objective is the same: reshaping the capital structure to create additional financial flexibility. What LMEs don’t do is change the underlying economics of the business. LMEs can extend maturities, reduce near-term liquidity pressure, or reallocate creditor priorities, but they do not create new demand, improve margins, fix an inefficient cost structure, or restore sustainable cash flow generation. Whether that additional runway creates value depends almost entirely on what management and sponsors do with it.
When are LMEs the right choice? Often, the data shows that an LME simply postpones a broader restructuring while the affected business continues to underperform.
14%
of LME participants avoided subsequent default or bankruptcy (2)
22%
avoided both bankruptcy and re-default within two years of an LME (3)
~57%
lower first-lien recovery rates at LME companies that subsequently defaulted, vs. non-LME issuers (4)
Sources:
(1) CreditSights by Fitch Ratings, US Liability Management Transactions: Quarterly Update
(2) S&P Global Ratings, tracking 35 companies across 38 LMEs, mid-2017 through August 2024
(3) Harvard/Oxford study of 89 coercive, non-pro-rata LMEs (2026); 56% had already filed for bankruptcy within two years
(4) Fitch Ratings, 2024
The rating agency data reinforces these findings from a different angle: credit ratings remain largely flat for two years following an LME. Aggregate leverage does not decline. The LME rearranges the liability stack; it does not reduce it. And when post-LME companies eventually do enter bankruptcy, they spend two to three times longer in Chapter 11 than comparable companies that filed without a prior LME — a direct function of the Byzantine capital structures LMEs tend to produce, with competing collateral claims, layered intercreditor rights, and creditor groups whose litigation postures were hardened during the LME negotiation itself.
This is not a rounding error. An 86% failure rate is a structural problem, not a run of bad luck.
The conclusion is not that LMEs are inherently illegitimate. In the right circumstances, with the right business, they can buy time that genuinely gets used. But the data is unambiguous that in most cases, LMEs don’t achieve the results leaders are hoping for, and for predictable reasons.
As a popular restructuring tool, it’s essential for sponsors to know when to use an LME
Recognizing when an LME is an appropriate tool (and what must happen alongside it to improve the business) helps PE sponsors and other stakeholders approach distressed or turnaround scenarios with clearer expectations and improve the likelihood of a durable recovery.
LMEs became increasingly common as a decade of covenant-lite lending collided with sharply higher interest rates and tightening credit markets. For sponsors, they offered a way to extend maturities, preserve control, and create additional runway without the cost and disruption of Chapter 11. Although recent court decisions and tighter credit documentation have narrowed some of the legal pathways for these transactions, LMEs are likely to remain a fixture of the restructuring landscape. Understanding when an LME is the right tool—and how to pair it with the operational and strategic actions needed to restore the business—will remain a critical capability for sponsors, management teams, boards, and creditors alike.
The core diagnostic failure: Balance sheet is not the business
LMEs often fail because they are deployed against the wrong problem.
Restructuring work involves two distinct but interdependent efforts: restructuring the balance sheet and restructuring the operations. Balance sheet restructuring is about the liability side of the ledger: funded debt, maturities, cash interest, covenant headroom, priority, and collateral. LMEs operate entirely in this domain. Operational restructuring is about the economics of the business itself: whether the company earns an adequate return on capital and generates sustainable free cash flow. That involves pricing discipline, product and customer mix, cost structure, working capital management, footprint rationalization, go-to-market strategy, and sometimes management.
These two efforts interact, but they are not interchangeable. A company in secular decline (such as a physical media retailer watching streaming eat its business, a legacy industrial manufacturer competing against low-cost offshore production, or a services business with a structurally broken pricing model) cannot deleverage its way back to relevance. The underlying economics do not improve because the debt matures in 2030 instead of 2026. Conversely, an operationally sound company that made a poor capital allocation decision, over-levered through an acquisition, or ran into a temporary market headwind can often recover with balance-sheet relief, provided management uses the runway to actually fix what is fixable.
The issue is that most distressed companies face both problems simultaneously. Financial pressure almost always accumulates because of operating underperformance, not as an independent event. When a company’s revenue is eroding, its margins are compressed, and its cash flows are insufficient to service its debt, the root cause is the operating performance. The balance sheet is the symptom. Treating the symptom without addressing the cause does not produce recovery.
There is also a management bandwidth problem that rarely gets discussed candidly. The months spent negotiating an LME—working through creditor groups, structuring drop-down mechanics, managing intercreditor disputes, documenting complex amendments—are months not spent on customer retention, product development, cost reduction, or operational execution. The team executing the financial transaction is, by definition, not simultaneously rebuilding the business. In situations where the speed of operational change matters most, the LME process consumes exactly the capacity that would otherwise drive recovery.
When LMEs actually work: The narrow case
The foregoing is not an argument that LMEs are never appropriate, but suitable use cases are often narrower than the market currently treats it.
There are recent examples of how LMEs, when used holistically, can deliver genuine value. For instance, Lumen Technologies illustrates the distinction well. Management used its debt restructuring to create time for a broader transformation that included cost reduction, operational simplification, AI-focused commercial growth, and balance sheet repair. As Lumen’s CEO described it, the restructuring “gave us ample time to execute our transformation.” The financial transaction created the runway; the operational changes determined whether that runway produced value. An effective LME should support an operational plan that management was already executing, rather than being used a substitute for one.
The diagnostic question every board and management team should ask before pursuing an LME is not: “Can we execute this transaction?” because with covenant-lite documents and enough liquidity to pay advisors, the answer is often “Yes.”
Instead, the right question is: “Does our business have a credible path to generating adequate returns at some reasonable capital structure, and will this LME create the time and space to execute that path?”
If the answer is: “Yes,” then an LME may be a legitimate bridge.
If the answer is: “Maybe, but we need to hope market conditions improve,” then an LME is probably not the right approach.
The above considerations are evidenced in practice:
Real-world examples: In some cases, our professionals have consulted with management teams who are reluctant to identify or address underlying performance issues because they’re waiting for external factors to change. In these instances, opting for a liability management exercise delayed the inevitable restructuring of their organizations, and the management teams, in hindsight, wished they had chosen one of the other avenues previously identified by our team.
By contrast, we’ve also partnered with proactive boards, investors, and management teams who choose a more holistic approach to turnaround, pairing an LME alongside efforts to improve operational performance. For instance, a large manufacturer worked with Riveron to use this combined (LME and operational improvement) approach, and the company was able to create, by conservative estimates, more than $500 million in enterprise value. And, in another successful example, Riveron helped an underperforming aviation company avoid formal restructuring, improve operations, and, ultimately, complete a sale transaction to a strategic buyer.
