“Counsel has been through the debt documents.”
Counsel read the credit agreement. The exposure is usually in the rest.
In a liability management exercise, the exposure usually sits outside the main credit agreement, in the amendments, side letters and subsidiary documents. A debt contract review takes about ten working days, and most of them go on searching: finding those provisions and working out which amendments are still valid, before anyone gets to judge them. That search is the part AI does well, as long as the firm’s own people build it on its own contracts.
By Tim Miner, founder and CEO · Published
PitchBook. Where a company did one before defaulting, first-lien recoveries ran about 57% lower (Fitch).
A liability management exercise (LME) is an out-of-court restructuring done inside the terms of an existing credit agreement. A borrower and a majority of its lenders agree a deal that gives the company cash or time. The cooperating lenders move up. Everyone else keeps their loans, with less behind them.
LMEs are now the main way companies with leveraged loans restructure. PitchBook counted them as 69% of leveraged loan defaults in the twelve months to December 2024, up from 20% in October 2020. Fitch found first-lien recoveries about 57% lower at companies that had done one before defaulting.
The wording
Why does the wording decide an LME?
On 31 December 2024, two courts ruled on two similar uptiers. The Fifth Circuit found that Serta’s 2020 deal was not an “open market purchase” under its credit agreement. The New York Appellate Division upheld Mitel’s 2022 deal, because Mitel’s agreement allowed “purchases” with no open-market condition. The two deals were close to identical, and the rulings went opposite ways because of a few words in each contract.
Serta2020 uptier
“open market purchase”
Fifth Circuit
Not an open market purchase
Mitel2022 uptier
“purchases”
New York Appellate Division
Upheld
The protections lenders now ask for turn on wording too. A J.Crew blocker, a Chewy blocker or a Serta blocker only works if its definitions and exceptions are drafted tightly. Whether a contract has one is a yes-or-no question. Whether it holds depends on the drafting, and that takes a careful read.
The review
Where does the usual LME review break?
A sponsor in debt diligence, a lender at origination and a lender watching its book all do the same work: read every credit agreement, indenture and amendment, and find the clauses that create or block LME capacity.
Most of a review’s ten working days go on searching for the right provisions across the credit agreement and every amendment, and working out which amendments are still valid, before anyone gets to exercise judgment.
Under deal pressure, the main agreement gets read closely and the amendments, side letters and subsidiary documents get skimmed. Those are often exactly where the capacity sits. The work is done again from scratch on every deal, mostly at hourly rates. Findings are written differently by each team and law firm, so nobody can compare risk across a portfolio. After closing, the contracts are rarely re-read until a problem arrives.
| The sampled review | The full read | |
|---|---|---|
| Where most of the ten days go | Searching for the right provisions | Judging them, with every provision found and linked |
| What gets read closely | The main credit agreement | Every agreement, amendment, side letter and subsidiary document |
| How findings are written | Differently by each team and law firm | Against the firm’s own playbook, each linked to its clause |
| Counsel’s time goes on | Searching for answers | Reviewing answers and signing off every flag |
| After closing | Rarely re-read until a problem arrives | Re-run on every amendment and compliance certificate |
| Mid-market review, 300 to 600 pages | About ten working days | About two working days (planning estimate) |
The build
What does reading every contract take?
None of that search needs new judgment. Every contract can be checked against the firm’s own playbook, with each finding linked to the clause it came from, so counsel reviews answers rather than searching for them.
A forward deployed engineer can enable a deal team and its counsel to build that:
Sort the data room
A pipeline that sorts the data room, links each amendment to its base agreement and shows which are still valid.Fill the register
An extraction pass that fills a register of baskets, blockers and voting thresholds.Map the guarantors
A guarantor map built from the structure documents.Counsel signs off
Counsel still signs off every flag, and the team still makes the call.
For a typical mid-market review, roughly 300 to 600 pages, our planning estimate is about two working days instead of ten: eight days saved per review. For a firm running 40 debt reviews a year, that is roughly 320 review-days back, plus faster IC cycles. The first week of any pilot replaces the estimate with the firm’s own baseline, taken from its deal records and counsel invoices.
The figure we would watch more closely is a different one: how many issues the full read finds that the sampled review missed. On the 10 to 20 agreements a firm has already had reviewed by hand, that count is the test.
The first step
Where should a firm start?
Debt contracts don’t stop mattering at closing. After an LME review, can your firm name every portfolio company with no J.Crew blocker?
Start with one scanner that scores each credit agreement against a benchmark of LME protections and runs on the firm’s own closed deals. The results can be checked against counsel’s existing memos within weeks. After that, the same register can be re-run on every amendment and compliance certificate, which is when monitoring the portfolio becomes practical.
- First
Score the closed deals
One scanner scores each credit agreement against a benchmark of LME protections, run on the firm’s own closed deals. - Within weeks
Check it against counsel
The results are checked against counsel’s existing memos. - After that
Re-run on every amendment
The same register runs on every amendment and compliance certificate, which is when monitoring the portfolio becomes practical.
As a Claude Partner, By The People builds this with your team in a six-week engagement. Counsel still signs off. Your team still makes the call.
LME risk is decided in the contracts long before any transaction happens. Firms that read all of them, the same way every time and with every finding sourced, price that risk better at entry and see it coming after closing.
Questions on LME contract review
What is a liability management exercise (LME)?
An out-of-court restructuring done inside the terms of an existing credit agreement. A borrower and a majority of its lenders agree a deal that gives the company cash or time. The cooperating lenders move up, and everyone else keeps their loans with less behind them.
Why did the Serta and Mitel rulings go opposite ways?
Because of the wording. Serta’s agreement allowed an “open market purchase”, and the Fifth Circuit found its deal was not one. Mitel’s allowed “purchases” with no open-market condition, and the New York Appellate Division upheld its deal. The two deals were close to identical.
Where does the time in a debt contract review go?
Mostly into searching: finding the right provisions across the credit agreement and every amendment, and working out which amendments are still valid, before anyone gets to judge them. LME capacity often sits in exactly the amendments, side letters and subsidiary documents a rushed review skims.
Does reading every contract replace counsel?
No. Each finding is linked to the clause it came from so counsel reviews answers rather than searching for them. Counsel still signs off every flag, and your team still makes the call.
How long does a debt contract review take?
About ten working days on a typical mid-market deal of 300 to 600 pages. Our planning estimate with the full read is about two, eight days saved per review; for a firm running 40 reviews a year, roughly 320 review-days back. The first week of any pilot replaces the estimate with the firm’s own baseline.
Sources
- PitchBook, “Data Dive: Leveraged loan default stats show rift in restructuring landscape” (December 2024).
- WTW, “Liability Management Exercises: the ‘quiet default’ that is reshaping credit markets” (October 2025), citing Fitch Ratings (2024).
- Paul, Weiss, “Appellate Review of Uptier Transactions: Serta and Mitel Decisions Reversed on Appeal” (31 December 2024).
- Oak Hill Advisors via T. Rowe Price, “The ‘Magnificent Seven’ lender protections”.
Want to see it run on your own contracts?
Book time with Tim or write to us. If your contracts tell a different story, we would like to hear that too.