Private Equity's New Debt Tactics Hit Lenders Hard

What's Happening

Bloomberg reports that private equity firms are increasingly using tiered debt structures in restructuring deals, creating a class system that favors large lenders while pushing others to the back of the line with massive losses.

Why It Matters

• Economic impact: This trend arrives as Donald Trump's tariff policies threaten to trigger more bankruptcies among PE-backed companies that often drive economic growth.

• Market shift: The practice upends decades of debt-market norms where lenders were traditionally treated equally during corporate restructurings.

• Rising costs: Borrowing costs could increase as lenders price in the added risks, creating another economic drag.

The Key Moves

• Tiered debt: Companies like Tropicana are dividing loans into multiple ranks worth dramatically different values - first-tier debt might be worth 95 cents on the dollar while third-tier holders get just 30 cents.

• Selective deals: PE firms and large asset managers form insider groups that get preferential treatment during "liability management exercises" (LMEs).

• Legal exploitation: These restructurings exploit lax legal wording in loan agreements signed when money was cheap.

By The Numbers

• Record activity: At least 33 companies with debt over $500 million conducted these transactions in the US last year.

• Massive volume: Distressed-loan exchanges totaled $42.7 billion in 2024, jumping 150% from 2023.

• Poor outcomes: Moody's estimates only half of distressed exchanges help businesses avoid defaulting again.

Key Players

• PAI Partners: Tropicana's owner currently negotiating a three-tier debt structure

• Clearlake Capital: Involved in multiple controversial LMEs, now attempting reputation repair with lenders

• Large asset managers: Firms like Carlyle, Blackstone, and Pimco typically secure spots in the favored creditor groups

Key Quotes

• Tuck Hardie, Houlihan Lokey: "There's definitely disparate treatment because of economic efforts to create tiers for large holders who tend to drive the transactions."

• Lauren Basmadjian, Carlyle: "Size matters and size helps... You have to make sure you have the right expertise and you're forcing your way into the right group."

• Scott Greenberg, Gibson Dunn: "They're the first call because they have the most risk on the table. As the big dogs, they'll get to eat first in these transactions by definition."

• Michael Handler, King & Spalding: "There may not be liquidity post the LME transaction [for lower-ranked debt]. It could become a highly speculative piece of paper."

The Wrap

As more lenders grow weary of these tactics, some are starting to pushback by refusing unfavorable terms and forming minority groups to fight for better treatment. However, the massive capital in private markets means PE firms still hold significant leverage in these increasingly contentious debt standoffs.