Partner Shai Schmidt recently spoke with PitchBook about the rising use of cooperation agreements and the potential challenges they present for distressed investors. Co-ops bind lenders to coordinate efforts to guard against aggressive LMEs. Under these arrangements, members are typically restricted from selling their papers to non-members.
Shai noted that although cooperation agreements are meant to give lenders more leverage vis-à-vis the borrower, some of them allow for disparate treatment within the co-op group. “Some co-op agreements, for example, offer ‘equivalent’—but not ‘equal’—treatment, which arguably leaves the door open for non-pro rata treatment,” said Shai. He also noted that some agreements expressly specify that debt exchanges aren’t required to be offered on a pro-rata basis.
In cases where non-pro rata treatment is anticipated, “Such provisions can also make it harder to sell co-op paper because potential buyers will be wary of binding themselves to terms that may be only marginally better than those offered to non-co-op lenders,” Shai said.