Blockers revealed: The next frontier in creditor protection

The Push

A liability management exercise ("LME") is, at its core, any transaction a company undertakes to manage its debt other than actually servicing it in the ordinary course of business. While these historically ranged from vanilla tender offers, exchange offers, amend and extends and consents, these are now topical primarily for their use in distressed debt situations. However, the discussion on LMEs is no longer only confined to active restructuring or special situations. LME related provisions (or their blockers) now regularly feature at earlier deal stages, including in commitment letters and grid terms, and ultimately in LBO financings, where sponsors and lenders negotiate flexibility or protections well before documentation is finalised.

The Pushback

Following a wave of high-profile US cases, such as Serta, J.Crew and At Home, issuers have shown how far documentary flexibility can stretch. In response, creditors have begun embedding contractual defences at the outset of transactions. A new generation of provisions, known as LME blockers, is now appearing across the leveraged-finance market, from commitment papers to covenant packages. Each targets a specific type of transaction seen in the market, aiming to maintain balance between flexibility and creditor protection.

Why It Matters

Each blocker responds to a different risk revealed by the LME playbook. Together, they serve four key purposes:

• preserve pro rata treatment by protecting non-participating lenders from being subordinated through priming or uptier exchanges.
• protect credit support and collateral value by limiting transfers of valuable assets to unrestricted subsidiaries (or otherwise outside the reach of creditors).
• maintain voting integrity by limiting certain debt issuances, adding rights of participation in new debt issuances or empty debt incurrences to obtain the relevant majority.
• close documentary loopholes that have allowed selective lenders or sponsors to extract value from others within the same capital structure.

The goal of LME blockers is to limit the ability of issuers/borrowers to use the flexibility embedded in financing documents in a non-pro rata or otherwise unexpected manner. They operate as an additional restrictive covenant, preventing the misuse of covenant capacity or structural features to engineer non-consensual amendments, exchanges or new-money transactions. In effect, blockers aim to ensure that liability management activity remains focused on more equal treatment for all creditors.

In the European market, blockers are increasingly viewed as an ex-ante safeguard, providing a contractual mechanism to pre-empt certain LME transactions before distress arises. This distinguishes them from cooperation agreements, which are typically ex-post creditor tools used once a transaction is already in motion. Together, they reflect a shift in deal practice toward more proactive creditor protection within otherwise flexible capital structures.

The Jargon

Each blocker targets a distinct LME manoeuvre:

• J. Crew / Pluralsight (Drop Down) → Limits the transfer of material assets or intellectual property to unrestricted subsidiaries (or to non-guarantors) outside the credit group. The risk addressed is value leakage – valuable assets being moved beyond existing creditors' reach.
• Envision (Drop Down) → Add on to J.Crew, which limits the aggregate amount of all basket capacity that can be stacked up to conduct J.Crew (drop down) type transaction.
• At Home / Sabre (Double Dip) → Addresses double-dip risk where new debt benefits from multiple recovery sources. For example, new debt supported by (i) guarantees of new notes from the restricted group (the first dip) and (ii) an intercompany obligation from the restricted group (the second dip).
• Chewy / Petsmart (Guarantor Release) → Limits document flexibility to release guarantors and transfer value outside the credit group. The provisions are designed to protect creditors from automatic release of a guarantor from providing guarantee only due to it becoming non-wholly owned.
• Wesco / Incora (Vote Rigging) → Protects voting integrity; prevents an issuer/borrower from issuing new debt to manipulate voting thresholds or coerce amendments.
• Serta (Uptier) → Prevents a borrower, with the support of one group of creditor, from creating or permitting such creditors debt that ranks ahead of or alongside existing debt without the consent of all affected creditors, thereby avoiding non-pro rata "uptier" outcomes that prime other creditors.
• Omni-blocker → Closes any remaining loopholes. A broad, catch-all formulation that prohibits any non-pro rata liability management transaction unless approved by all lenders or carried out on a pro rata basis. It is effectively a "belt and braces" clause capturing future innovations not yet seen in the market.

Amendment Majorities

To add further protection around blockers or covenant capacity such as the super senior basket (if increased will prime further existing creditors), creditors should consider increasing the required majority from a simple majority to a higher threshold. Otherwise, issuers working with a small number of friendly creditors may strip those protections. In addition, creditors should seek to protect their "majority" position either through limiting additional debt or by requiring right of first refusal / right of first offer for any new debt issuance which may impact existing debt structures.

Market Adoption

According to Octus (H1 2025)¹:

EMEA Loans

• J.Crew-style blockers: ~76% of transactions
• Chewy-style protections: ~78%
• Anti-Serta provisions: ~90%

EMEA High Yield

• J.Crew-style blockers: ~42% of new issuances
• Chewy -style restrictions: ~11%
• Anti-Serta protections: ~13%

This data illustrates that almost all new European loan deals now embed at least one LME-related safeguard and the inclusion in bond deals are on the rise. That said, the specifics of each blocker needs to be assessed on its merits and there is still deviation in the specifics of the drafting, and therefore the effectiveness, of each blocker.

Market Considerations

Europe has begun to see a clear increase in liability management exercises, with transactions such as Hunkemöller (uptier) and Victoria (uptier) showing that these techniques are no longer confined to the United States. European markets have traditionally been slower to adopt LMEs, restrained by a combination of legal and structural factors. English case law limits the use of majority powers where this would amount to an abuse of majority and requires that such actions be taken bona fide for the benefit of the creditor class as a whole. In many continental jurisdictions, directors face heightened duties and, in some circumstances, potential civil or criminal liability for transactions that prejudice creditors once a company approaches insolvency. Relationship based lending practices also play an important role, as borrowers are often unwilling to jeopardise long term creditor relationships by pushing coercive tactics too far. Nevertheless, recent transactions demonstrate that LMEs are gaining ground and that protective drafting is evolving in parallel. Each new blocker is a response to the last loophole closed, and its effectiveness depends on the precision of its wording and on how difficult it is to amend.

Key Takeaways

The market continues to evolve as new liability management techniques test the limits of existing documentation. The most effective protections are structural rather than reactive – including a back to basics approach with more limitations on fundamental deal terms such as leverage and leakage from the outset. Smaller baskets, reduced debt capacity, tighter control over unrestricted subsidiaries and higher amendment thresholds all help to prevent majority lenders from removing essential safeguards. Increasing consent majorities to capture amendments that impact creditor rights can also mitigate risks. These measures have always provided a strong defence against value leakage and dilution in the capital structure. At the same time, continued drafting innovation will aim to close the loopholes revealed by recent transactions. Anticipating where flexibility can turn into vulnerability and ensuring that documentation keeps pace with market creativity are the best safeguards against the next generation of liability management risk.

_{1 Octus, H1 Wrap, EMEA High Yield, EMEA Leveraged Loans and US High Yield and Leveraged Loans, accessible at EMEA High Yield, EMEA Leveraged Loans, US High Yield and Leveraged Loans.}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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