Restructuring trends: Why maturity is the new security

Intended for non-US audiences only

Global credit markets are changing. Restructuring dynamics now challenge long-held assumptions about risk and recovery. Even with default rates currently low, investors are increasingly aware that debt maturity – not just the security or seniority of the debt – can heavily influence outcomes in distressed situations.

Maturity over security in restructurings

In recent restructurings, particularly in the US, maturity has often trumped lien position in determining creditor influence. In out-of-court processes like liability management exercises (LMEs), holders of bonds that mature first frequently drive the negotiations. By agreeing to extend maturities or contribute new financing, these creditors can elevate (or ‘up-tier’) their priority – potentially leaving holders of longer-dated bonds, or even those with equally senior claims, at a disadvantage. As illustrated in the chart below, recent recovery rates show a trend for superior recovery rates negotiated via LME with an average of 51% versus ex-LME average of 35%.

This tactic is no longer confined to the US. European markets are seeing similar strategies, often led by credit hedge funds using US-style approaches. This makes it essential for global investors to understand class voting rules and legal frameworks across jurisdictions.

Case study – Ardagh Group* (2024 LME)

The power of maturity was clearly illustrated during Ardagh’s protracted debt workout. Holders of Ardagh’s secured bonds maturing in 2025 emerged as the winners, being taken out (redeemed) at par in June 2024 – roughly 10 months ahead of schedule. In contrast, investors holding Ardagh’s equally ranked secured bonds due to mature in 2026 were forced into a much less favourable position, having to exchange their 2026 notes into second-lien bonds and even inject new money as part of the deal. This restructuring plan is still ongoing, but early indications suggest the newly exchanged bonds will trade at a significant discount to par, while leaving these longer-dated bondholders facing the risk of further restructuring down the line.

Strategic implications for investors

These developments should prompt investors to reassess recovery assumptions and strategies. Traditional models that assumed secured bonds would automatically fare better may not be as relevant going forwards. We believe in this environment a more granular bond-by-bond analysis would be more appropriate. Investors are more likely to scrutinise specific holdings (particularly long-dated instruments low in the capital structure) that could be vulnerable in a future restructuring.

Awareness of ‘creditor-on-creditor violence’ has been growing over the past few years with several notable cases (e.g. J Crew, Serta) now driving specific documentation in bond indentures.  The result of this violence typically includes the portion of investors who have controlled the restructuring, being elevated at the expense of other bondholders who had identical claims as the steering committee group.  

Forms of recovery may include scenarios where investors in the same bond issuance are excluded from advantageous refinancing deals, leaving them with securities that lack customary investor protections. In some cases, investors may be left holding take-back instruments that offer only payment in kind coupons, extended maturities, and/or lower quality collateral.

To guard against this, investors must scrutinise bond covenants and security packages closely to truly understand their place in the creditor hierarchy.

Looking ahead

The shift from court-supervised restructurings to more out-of-court workouts, combined with the rising importance of maturity over traditional notions of security, marks a fundamental change in the distressed credit landscape. As these trends spread from the US to Europe and beyond, staying alert to evolving restructuring tactics and legal innovations will be critical. Investors who adapt by focusing on maturity profiles, deal structures, and covenant details will be better positioned to navigate the next phase of global credit markets.

 

*Case study shown for illustrative purposes only. The above information does not constitute a recommendation to buy or sell any security. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an L&G portfolio.