Cooperation Pacts Are Giving Some Creditors a Leg Up

Cooperation pacts, intended to prevent infighting among creditors of struggling companies, are paradoxically creating significant divides and pricing disparities in debt. A specific clause within some of these agreements is granting a premium to creditors tied to steering committees, effectively giving them a preferential position over other lenders.

Analysis

A structural fragmentation is emerging within creditor groups of distressed companies due to specific clauses in cooperation pacts. Originally designed to foster unity and prevent infighting among lenders, these agreements are now reportedly creating significant pricing disparities in the underlying debt. The mechanism driving this divide is a clause that grants a premium to the debt held by creditors who are part of steering committees. This effectively establishes a two-tiered system, advantaging a select group of lenders over others within the same creditor class. This development, which carries a moderately negative sentiment, introduces a new layer of complexity and potential conflict into restructuring negotiations, undermining the intended purpose of such pacts and requiring a more granular analysis of inter-creditor dynamics.

Key Decisions for Investors

• Investors in distressed debt must intensify due diligence on cooperation agreements, specifically identifying clauses that create a tiered structure or provide preferential economics to steering committee members.
• For activist funds and large credit holders, securing a position on a creditor steering committee may now be more critical, as it could translate directly into a pricing premium for their debt holdings.
• When evaluating positions in a struggling company's debt, investors must now factor in a potential discount for paper held outside of the steering committee, as the presence of these new-style cooperation pacts can directly impact relative value.