Restructuring Without the Courtroom: How Companies Now Fix Broken Balance Sheets

A company that could not carry its debt used to end up in bankruptcy court. Today it usually ends up in a conference room. Transactions known as liability management exercises, private deals that rework a company's debt outside of court, now account for roughly 65 percent of default activity by count, up from about 9 percent at the start of 2020. For business owners, that shift changes what financial distress looks like, how long it stays hidden, and what options exist when a balance sheet gets tight.

The Quiet Replacement of Chapter 11

For decades, Chapter 11 was the default tool for a company in serious financial trouble. It remains powerful: a filing stops creditor lawsuits, allows contracts to be rejected, and can force a deal on holdout lenders. But it is also expensive, slow, and public. Professional fees in a mid-sized case routinely run into the tens of millions of dollars, proceedings can stretch a year or longer, and the filing itself alarms the customers, suppliers, and employees the business needs to keep.

So the market built alternatives. Restructuring data provider Octus reports that liability management exercises reached record volume in 2024 and kept that pace through 2025, and advisory firms across the industry describe out-of-court deals as the defining feature of the current distress cycle. The pattern extends beyond giant leveraged buyouts. Turnaround advisors report that for many middle market businesses in significant distress, out-of-court processes are now viable and often preferable to a filing.

The result is a distress cycle that looks calm on the surface. Bankruptcy statistics no longer capture most defaults, because most defaults are resolved before any petition is filed. A company can restructure hundreds of millions of dollars of obligations without a single court appearance, and its customers may never know.

What a Liability Management Exercise Actually Is

The term covers a family of techniques with one common idea: instead of filing for bankruptcy, the company renegotiates its debts directly with some or all of its lenders, using flexibility already written into its loan documents.

The gentlest version is an amendment and extension, in which lenders push the maturity date out several years in exchange for fees, a higher interest rate, or tighter terms. A step further is a debt exchange: lenders trade their existing loans or bonds for new instruments, often at a discount to face value, in return for a stronger claim on the company's assets. Because the new debt sits closer to the collateral, lenders accept less than they were owed, and the company's total obligations shrink without a filing.

The aggressive end of the spectrum is where the technique earned its reputation. In some deals, a majority group of lenders provides new money and amends the documents to place itself ahead of the minority who were not invited, a maneuver known as uptiering. In others, the company moves valuable assets, a brand or a division, into a subsidiary outside its lenders' reach and borrows against it separately. These moves pit creditor against creditor, and they have produced years of litigation over what loan documents actually permit. Lenders have responded by organizing early, signing cooperation agreements that commit them to negotiate as a single bloc before a borrower can divide them.

Why This Cycle Is Different

Three forces explain why out-of-court deals dominate this cycle. The first is the growth of private credit. Direct lending funds now hold a loan market estimated at $1.5 to $2 trillion, rivaling the syndicated market. When a company's debt is held by a handful of funds rather than hundreds of scattered bondholders, a private negotiation is practical in a way it never was before.

The second is the math of the 2021 vintage. An enormous volume of loans was underwritten at the low rates and high valuations of 2021, and those loans are now maturing into a world of higher rates and, for some sectors, tariff-driven cost pressure. Many of these businesses are sound but overleveraged; their problem is the balance sheet, not the operation. That is precisely the problem an out-of-court deal can solve.

The third is documentation. The looser covenant packages written into larger loans over the past decade created the flexibility these maneuvers rely on. Notably, tighter documents in the lower middle market mean aggressive liability management remains rare in smaller loans, so the experience of distress still differs sharply by company size.

The 2026 outlook adds a caution. Restructuring analysts describe this year as a tale of two themes: continued aggressive liability management on one side, and on the other a growing volume of owners handing the keys to creditors or pursuing distressed sales after earlier fixes fell short. An exchange that only trims debt without fixing the underlying business tends to resurface as a deeper restructuring within a few years. Advisors increasingly frame the question as whether an exercise is a bandage or a bridge.

What This Means Depending on Where You Sit

If you own or run a leveraged business, the practical lesson is that distress now has more exits than it used to, and the good ones reward early movers. Lenders generally prefer a consensual amendment to a filing, but their flexibility depends on credibility: current financials, a realistic 13-week cash flow forecast, and an operating plan that addresses why performance slipped. Owners who open the conversation a year or more before a maturity generally keep more options, and more equity value, than owners who wait for a default.

If your customers or key suppliers carry heavy debt, the new playbook cuts both ways. An out-of-court deal usually leaves trade creditors untouched and paid in the ordinary course, which is better than the frozen claims a bankruptcy filing produces. But because these deals are private, the warning signs are quieter. A customer that just completed a discounted exchange is still a stressed company. Slowing payments, changed order patterns, and news of lender negotiations deserve attention even when no filing ever appears.

If you are looking to acquire, the second theme of 2026 matters: more owners are expected to sell rather than restructure again. Distressed sales of fundamentally sound but overleveraged businesses can offer buyers assets that rarely come to market, though diligence must extend to the seller's creditor dynamics, since lender consent will often shape what a sale can look like.

If you hold rollover equity in a sponsor-backed company, understand that a liability management exercise typically sits above you in the capital structure. New priority debt and discounted exchanges can preserve the company while pushing equity further underwater. Minority holders should use their information rights and ask how any proposed exercise affects the equity, not just the debt.

What to Watch Next

Three developments will shape how this plays out through 2027. Maturities from the 2021 lending boom continue to come due, keeping the pipeline of candidates full. Private credit workouts are increasingly handled inside lending funds, invisibly, which means public distress measures will keep understating the real level of strain. And courts continue to rule on the aggressive techniques of the last few years; each decision redraws the line between creative and impermissible, and loan documents adjust within months.