The rise of Liability Management Exercises (LMEs) among high-yield issuers has primarily been driven by covenant-lite structures. These conditions allow managers reallocate assets, modify terms, and exchange instruments, also leading to a large increase of “distressed exchanges” (where troubled issuers offer bondholders reduced-value securities for existing bonds). This helps ease financial distress and avoiding an outright default.
Default rates vary across data sources. While high-yield recoveries are currently very low in a historical context, the numbers improve significantly when distressed exchanges are included. In 2024, over half of recoveries are expected from distressed exchanges, marking a notable increase. Looking ahead, we expect these activities to remain a key focus for all investors. As creditor-on-creditor conflicts increase, management teams are likely to be more open to negotiations in a challenging credit environment.
