Saying No: the Power and Peril of the LME Holdout
Some par investors and opportunistic credit funds are turning down the “consolation prize” in non-pro-rata liability management exercises, or LMEs, and they are getting what they want – a par recovery.
In the LME 3.0 era, deal architects, including principals, lawyers and bankers that represent companies, sponsors, and creditors’ steering committees, are fine-tuning their ability to find the sweet spot where the “in-group” transfers just enough value to minority creditors for them to accept the second- or third-best terms and not litigate.
Some investors, however, facing a growing list of punishments to recalcitrants, have chosen to sit out. Their rationale includes: the transactions are illegal and wrong, their take-back paper may be below the fulcrum in a subsequent chapter 11, the need to stop the vicious circle of getting left out, and the belief that they could get a better deal by opting out.
To have an effective holdout strategy, it is essential for the investors to have a comprehensive war plan and keep innovating, commit to the fight and have patience.
The decision to hold out can be seen as a signal to companies and advisors that the investor is willing to fight for better terms, potentially avoiding being consistently offered lesser terms in future deals. However, holding out can also be risky, with the possibility of receiving minimal returns in a restructuring or losing in court.
Reporting by Harvard Zhang
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