The rising use of cooperation agreements creates potential challenges 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.
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. 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.
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