On July 1, 2024, the Loan Syndication and Trading Association (LSTA) published a timely and important market advisory for market participants active in the secondary loan trading market. In light of the widespread use of liability management transactions (often referred to as creditor-on-creditor violence) by borrowers/sponsors in the broadly syndicated loan market to restructure their debt obligations, more and more lenders are banding together through cooperation agreements to protect their economic interests in stressed/distressed credits. The goal of such cooperation agreements provides, in part, that the majority group of participating lenders will all be treated equally in a liability management transaction (whereas nonparticipating lenders may be treated less favorably).
In response to this surge of ad hoc groups of lenders signing cooperation agreements and other similar agreements such as transaction support agreements and restructuring support agreements (collectively referred to as lock-up agreements), the LSTA published an advisory strongly recommending that whenever a party is looking to sell loans subject to a lock-up agreement that the selling party notify a prospective buyer that such loans are subject to a lock-up agreement before entering into the trade.
A hallmark feature of lock-up agreements include additional transfer restrictions which require end buyers of loans (which are subject to lock-up agreements) to agree to be bound by the terms and conditions of the lock-up agreement. Although there may be benefits for creditors that become a party to a lock-up agreement, the agreements also come with certain negative obligations limiting the rights of a creditor that may outweigh the benefits. For this reason, an end buyer may not want to purchase loans subject to a lock-up agreement.
Discovering that loans being purchased are subject to a lock-up agreement after the trade date can raise significant legal and settlement issues that may result in unnecessary delays within the secondary trading market. By following the LSTA advisory’s guidance, market participants can avoid such delays and issues.
Should you have any questions about lock-up agreements or the advisory, please do not hesitate to reach out to our Distressed Debt & Claims Trading Team.