Lenders are giving themselves more levers to pull in the event of bankruptcy
Lenders are giving themselves more levers to pull in the event of bankruptcy.
Six years after the pandemic pushed heavily leveraged companies into distress, some of the lenders that took control are beginning to cash out.
Tailored Brands , owner of clothing chain Men's Wearhouse, filed on July 10 to return to the public markets. Credit investor Silver Point Capital , which has owned the business since its 2020 restructuring, will remain the principal shareholder.
Strategic Value Partners and Sixth Street Partners sold $743 million of LATAM Airlines stock in a secondary equity offering in February, winding down a stake they inherited through the bankruptcy of Latin America's largest airline holding company in 2022.
Aeroméxico , whose largest creditor was Apollo Global Management , has traded in New York since November. The listing raised $223 million and came three years after Mexico's flagship carrier embarked on a $5 billion post-bankruptcy fleet modernization plan.
With defaults and bankruptcies edging up once more, these are useful case studies of what happens when lenders take the keys to a company. But many private credit managers appear already to have learned their lessons, according to bankruptcy experts.
Some lenders now negotiate ownership structures at origination that would make a future debt-for-equity conversion more efficient, said Joshua Sturm, a partner in the restructuring group of law firm Proskauer. Clients are going beyond closing liability-management loopholes, he said, and are "insisting on ownership structures that would facilitate the most efficient equitization process if that ever becomes necessary."
One example from his practice involves stacked holding companies above the borrower, so lenders can foreclose on equity at the top layer and still sell it cleanly at the next: "structural protections that would show up on an org chart," he said, that borrowers often barely notice "because it doesn't cost much to do."
This is not because lenders want the keys, Sturm said. Equitization is "sort of a last resort in most situations," but they want it to go as smoothly as possible if it comes down to it.
The preparation extends beyond capital structure, said Daniel Shamah, a partner in Debevoise & Plimpton's restructuring group. More lenders are using liability management exercises, or LMEs, not just to swap out debt and extend maturities, but to gain more control over corporate governance. This could include reserving the right to delegate key business decisions to lender-appointed directors.
"More investors now using LMEs defensively to pre-wire different contingency plans that bypass bankruptcy if the 'Plan A restructuring' doesn't succeed," Shamah said.
Private credit funds are in a unique position to pull these maneuvers. Banks and collateralized loan obligations often face restrictions on holding equity, so they remain focused on getting back what they put in. According to Jennifer Harris, a partner in Dechert's Capital Solutions group, distressed funds and direct-lending platforms "may actively underwrite to an ownership scenario from inception."
A lender that takes super-priority status in an uptier exchange or new-money financing, she said, "is often simultaneously positioning itself as a potential controlling equity holder in a subsequent restructuring."
Senior lenders pre-wiring the route to control is not the same as pre-wiring the outcome, she added. The claims of junior creditors and equity holders must still be dealt with through some form of negotiated process.
A significant reason for this contingency planning is that the last generation of LMEs failed at a high rate, with many ending in the bankruptcies they were designed to avoid.
A study of more than 50 bankruptcies by PitchBook found that repeat bankruptcies clustered more heavily among businesses with unresolved operating problems. Affordable jewelry retailer Claire's , event supply store Party City and pharmacy chain Rite Aid all returned to bankruptcy within roughly two years of a creditor-owned emergence. Spirit Airlines ' bondholders converted about $795 million of debt to equity in a 114-day prepackaged case and took ownership in March 2025. The airline filed again five months later and shut down operations in May.
Operational restructurings that use the full bankruptcy toolbox—renegotiating leases, labor agreements and unprofitable contracts alongside the debt—performed better.
"Usually it's focused on something that's temporary or one-time in nature," said David Tawil, president of ProChain Capital and a former distressed-debt investor. "Those are the best opportunities—if you can solve the liquidity challenge that a company has."
Chapter 11 bankruptcy protection can cut leverage and interest expense. It cannot restore demand.
