Creditor Corner 2025 Special Feature

Special Edition:

Year in Review and What to Expect in 2025

It’s that time of year again. We asked our Contributors for their picks and pans for 2024 and what to expect in 2025.

2024 was full of surprises. The restructuring field never ceases to amaze us. From the outcomes in Incora and Robertshaw to Jones-gate, the headlines just kept coming and coming and coming…. Let’s peer into our crystal ball to see what changes we might expect in 2025. Read what our contributors have to say about the shifts, turns and changes to expect during 2025.

Will Delaware keep its top spot?

Rachel Albanese & Daniel Shamah nearly in unison: Delaware. Back to basics.

Kevin Eckhardt.  Houston, nowhere else is safe and they clearly want to keep the party going.

Josh Feltman:  I don’t see any reason for things to change all that much. New Jersey may correlate with retail, but beyond that…..

Mark Lightner. Southern District of Texas.

Jennifer Selendy:  Here’s hoping it’s SDNY.

Paul Silverstein:  It is clear that Houston and Delaware will continue be the two principal venues for large complex chapter 11’s in 2025. The fallout over “Jonesgate” seems to be ending and Houston is ultra “predictable” with its complex case assignment rules that either Judge Perez or Lopez will preside (much like a filing in the SDNY’s White Plains division used to be assured of getting former Judge Drain).  

Cliff White: How is it possible that the Southern District of Texas will retain or exceed its position as the number 2 bankruptcy filing haven in the United States (behind only Delaware) while the Jones-gate scandal goes unredressed? 

LMEs dominated in 2024. Will the trend continue?

LMEs. Covenant Review tracked over 30 transactions year to date that involved LME elements in 2024. In contrast, less than 20 comparable LMEs were tracked in 2023.  More and more of these subordinate existing lenders according to S&P. How many do you expect in 2025? 

Rachel Albanese: 50? The better question is how many will have a lasting, net positive impact?

Kevin Eckhardt.  I expect over 100, because every refinancing/recap transaction now features some element of LME-ness. Unless Serta gets reversed, then there will be zero because truly abusive transactions will feature some new label. Bring back Jones’ “PET.”

Josh Feltman:   A lot:  euphoric markets will lead sponsors to take advantage and stock acorns for winter; i.e., cash in on loose covenants in pre- (or only modestly) distressed situations by putting cash on the balance sheet, even at the expense of covenant flexibility that could drive discount down the line.

Jennifer Selendy: 30+

Daniel Shamah. 43.2

Paul Silverstein:  It’s obviously difficult to put a precise number on LMEs for 2025, but we will likely see as many, if not more, in 2025 than in prior years.  

Co-Ops: Good or Bad?

Rachel Albanese. Good if used to maximize value instead of throw bombs. 

Kevin Eckhardt.  Good, if they get enforced in bankruptcy. The less litigation among creditors the better. We’ll see how Houston views them when a debtor objects (spoiler: Houston will not enforce).

?Josh Feltman.  Good, if open to all; bad if used by a 51% group to consolidate power at the expense of the minority; and indifferent in many situations, as existing covenant flexibility makes voting-control blocks irrelevant and companies can do deals with financing sources other than existing lenders.

Mark Lightner.   Both.  They can stymie unfriendly LMEs (good), but also create unfair divisions between favored creditor groups at the expense of those creditors who are not parties to the agreement (potentially bad).

Jennifer Selendy: It depends.  If used to enforce pro rata rights that exist and address breaching transactions, good.  If used tactically to create leverage where it otherwise doesn’t exist or effectively renegotiate terms, bad.

Daniel Shamah. Neither. They may encourage more consensus. But they also just as often lock people out of deals, making it even harder to achieve consensus

Paul Silverstein.  Both+. If you’re an excluded lender, they’re bad.  If you’re a lender in the coop group, they’re good.  If you’re the group’s counsel, they’re very good.

Will Serta be reversed by the 5th Circuit?

Rachel Albanese. Yes

Kevin Eckhardt.  No. I think circuit court got its frustrations with Houston out of its system with the Jones complaint and Ultra.

Josh Feltman. Soorrrrrt of… I predict a referral to a New York court.

Jennifer Selendy. Yes. If there is any justice, the 5th Circuit will reverse.

Daniel Shamah. Yes. I think the Fifth Circuit will reverse and remand for further factual development.

Paul Silverstein.  Yes.  While the Fifth Circuit has not been quick to decide the appeal, I certainly hope/think that we will see a reversal of Judge Jones “open market ruling” in Serta. 

Is Restructuring Dead?

Rachel Albanese. No. In time, LMEs hopefully will become one of the tools in our restructuring toolbox, not a sideshow.

Kevin Eckhardt. No. Restructuring is “liability management.” Always has been (astronauts in space with gun meme). LMEs are just bankruptcy-style one-sided restructurings crammed down on minority creditors and dissidents before a petition is filed. In other words: Restructuring is not only not dead, it is a fungus slowly spreading and taking over all other forms of life.

Josh Feltman.  Not all out of court activity is “LM” rather than “restructuring”.  I believe the sophistication of the parties and the enormity of the pools of capital in consolidated hands means less in-court activity overall; and I believe some LM will succeed in preventing restructurings that even 10 years ago might have been necessary, for want of other means of obtaining liquidity; but LM won’t fix a broken business model or even, in most cases, a fundamentally over-levered balance sheet.

Sydney Levinson. As liability management has increasingly become synonymous with creditor-on-creditor violence, the need has arisen for a new euphemism to describe our industry.  If I were to take a crack at it, I’d suggest something like “financial redecorating” or “balance sheet renewal.” That said, this is probably a job best left to the same investment bankers who devise clever code names for projects (my personal favorite was Project Rubicon, the code name used for the Caesars restructuring).   Or perhaps a contest sponsored by the Creditor Rights Coalition with a suitable prize for the winner.

Mark Lightner.  Restructuring is not dead, and the existence of weak covenant protections has facilitated the recent surge in LMEs and out-of-court restructurings.  Although many believe that the chapter 11 process has become too expensive and unwieldy, there will always be a need for more formal restructurings.

Jennifer Selendy. Parties will continue to be creative in finding ways to avoid or delay filing.

Daniel Shamah.  We go by “solvency strategists.”  We’re still workshopping it!

Paul Silverstein.  Restructurings are not dead, and never will be dead; but the trend will continue to be “amend and pretend”. 

Ian Feng of Covenant Review weighs on key developments during 2024 for the Creditor Rights Coalition. Read on for what he has to say:

For the leveraged loan market, 2024 was a year of incremental changes when it came to liability management exercises (LMEs), not bold evolution. Distressed borrowers and their advisors continued to follow the tried-and-true trichotomy of dropdown / uptier / double dip (including “pari-plus”), with the occasional combination of two or more of these approaches. However, 2024 was not without excitement as some salient trends illustrate. 

“Consensual” uptiers. 2024 was the year that uptiers emerged from secretive backrooms into the light of day with affected lenders often given the bona fide opportunity to participate in new priming paper. Unfortunately, “bona fide” does not always mean “fair,” with several transactions illustrating significant deltas between the “haves” (those in the steering group) and “have-nots” (everyone else). Indeed, minority lenders could be offered less than ideal economics, including PIK terms and/or significant haircuts. The rise of such voluntary exchanges can be tied to a number of factors, including (1) the growing prevalence of “Serta blockers” (which sometimes include a ROFR exception) and (2) an attempt by borrowers to litigation-proof their LMEs (via broad waiver language).  

Co-op agreements. 2024 also saw an increasingly proactive approach taken by lenders to get ahead of potential LMEs, with co-op agreements being reported in a significant number of distressed names, including Altice, Astound Broadband, Multi-Plan, among others. These “loyalty pacts” (as they are sometimes known) in theory inhibit lender-on-lender violence by establishing a unified bloc against borrower-led LMEs. On the other hand, co-ops can also exacerbate majority-minority splits by freezing out those lenders not party to such agreements. Potential side effects also abound, as handcuffing borrowers in this manner may result in more scorched earth restructuring proposals.  

An unwelcome debut. In June 2024, Pluralsight reportedly transferred material IP to a restricted non-guarantor subsidiary. Vista (Pluralsight’s sponsor) then extended a loan backed by the IP to finance the interest payment at the parent level. While the nature of the transaction was distressingly familiar, the context was not, with many observers calling Pluralsight’s maneuvering as the first publicized instance of an LME in the private credit (PC) market. Is Pluralsight a sign of things to come for the PC market or an outlier? The future is hazy but note that “lender-on-lender violence” is arguably less likely to occur in PC deals given that lender groups tend to be more unified and covenant terms stronger than in their BSL counterparts.

Qualified court wins. On the judicial front, key decisions came down in 2024 addressing LMEs in RobertShaw and Incora (the latter an oral decision). Both cases were broadly viewed as creditor friendly (in contrast to earlier decisions like Serta). In Incora, Judge Isgur voided a 2022 LME, admittedly on the esoteric issue of “vote rigging.” In RobertShaw, Judge Lopez found the borrower to have violated its superpriority credit agreement, though this time, the holding turned on a technical argument as to which entities constituted “Required Lenders.” Thus, neither case broached LME legality as a general matter, and both cases’ somewhat narrow take on post-LME remedies may have a chilling impact on future litigation. With several LME-adjacent cases still pending (including AMC and a written opinion in Incora), it is far from clear whether 2025 will carry on creditors’ recent judicial “win” streak.

Contributor Cliff White comments on two of the most vexing issues in Chapter 11 excerpted below. You can find his full feature here.

 A lot of important things have happened in the world of bankruptcy this year.  But a number of significant matters await resolution in 2025 – if not beyond.  Following is a description of two such matters:

Will Legal Actions in the Jones-Gate Scandal Ever Conclude?

In late 2023, Bankruptcy Judge David Jones in the Southern District of Texas admitted in response to reporting by the Wall Street Journal that he was living with a lawyer whose firm frequently appeared before him.   As the scandal unraveled, it turned out that Judge Jones had approved millions of dollars in legal fees for his romantic interest and her law firm.  He even mediated disputes in which she represented one of the parties.  After the Fifth Circuit found “probable cause” that he committed serious ethical violations, Judge Jones resigned. 

In November 2023, the United States Trustee (UST) began filing 33 actions to disgorge or deny more than $20 million in fees that Jones awarded to the Jackson Walker (JW) law firm where his romantic interest had been a partner.  The UST alleged multiple legal violations by JW, including conflicts of interest, failure to disclose, and other ethical breaches.    

Most observers thought that this matter, called Jones-gate by some pundits, would be handled with dispatch so the scandal did not fester any longer than necessary.  But it is not turning out that way, to say the least.  

It is highly ironic that this fee disgorgement dispute may end up taking two years or more to resolve by the same bankruptcy court that has prided itself on confirming mega-chapter 11 cases in as little as one day.

Can Venue-Shopping Get Even Worse?

A lot has been written about the loose bankruptcy venue laws that seem to let corporate chapter 11 debtors file about anywhere they choose regardless of their state of incorporation or where their base of operations or assets are located.

Just when one might have thought it could not get worse, Red River Talc filed in the Southern District of Texas (case no. 24-90505).  The parent company in this case is the behemoth Johnson & Johnson (J&J) corporation which seeks a third-party release for its alleged asbestos liability.  The venue problem is that this is the third bankruptcy case filed in three districts over three years seeking essentially the same relief.  The Third Circuit twice has ruled that previous filings were made in “bad faith” because the debtor itself was a shell without any “financial distress” of its own.  In a transparent attempt to evade the Third Circuit decisions, J&J incorporated Red River Talc (as the successor entity to the previous debtor known at LTL) in Texas so it could file in the SDTX under the place of incorporation prong in 28 USC 1408.  The UST and creditors moved for transfer of venue under the interests of justice and convenience of the parties standards contained in section 1412.  The bankruptcy court said “no,” it was keeping the case.   

Even prominent Fifth Circuit Judge James Ho and Northern District of Texas Judge District Judge Reed O’Connor, who have expressed misgivings about imposition of proposed national case assignment rules, have decried what Judge Ho called alleged “forum selling” in bankruptcy cases.  As Judge Ho said, “We expect lawyers to favor their clients.  We expect judges to favor nobody.”

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