Description

Cooperation agreements are a defensive strategy by syndicated lenders in response to the growing number of liability management exercises (LMEs) initiated by distressed borrowers to gain additional liquidity and restructure debt, usually to the detriment of non-participating lenders. Under a cooperation agreement, a lender agrees with a subset of other lenders that it will not enter into any side deal with the borrower, the borrower's affiliates, or noncooperating lenders at the expense of the other cooperating lenders. By banding together, individual lenders protect their position in the capital structure and enhance their bargaining power in a restructuring situation or when an LME has been executed.

Cooperation agreements are typically sought by lenders early on in a loan's life cycle or during the initial stages of a borrower's distress and are intended to be in effect for a short period of time. These agreements can strengthen flexible credit documents and introduce new terms to guard against LMEs.

While the biggest advantage of a cooperation agreement is that it unites creditors, one key disadvantage is that these agreements often only allow transfers of loans to other cooperating parties or buyers that become cooperating parties when they purchase the loan. These transfer restrictions can potentially limit an investor's liquidity because these loans often trade at different price points than non-cooperation loans.

Listen as our expert panel reviews the key terms, objectives, and obstacles underlying cooperation agreements and provides guidance for lenders utilizing these agreements to enhance their bargaining power while also mitigating the risk of being left behind as an excluded lender.