Liability Management, Defaults, and the MNPI Risk Hiding in Plain Sight
If you spend your days looking at leveraged loans and high yield credit, you already know the headline story: defaults are rising again, and liability management exercises are doing more of the heavy lifting in restructurings.
PitchBook’s latest European Default Monitor shows that while the traditional payment default rate in the Morningstar European Leveraged Loan Index is still under 1% by principal amount, the picture changes once you add distressed exchanges and liability management exercises. The combined rate by issuer count jumps to about 2.15%, and a full quarter of companies restructuring their loans are repeat users of these tools. Media, healthcare and software lead the way, and the share of distressed loans in the index has reached its highest level since mid-2023.
Those are credit statistics. Underneath them sits a less visible story: a sustained increase in material nonpublic information, wall crossing, and conflict risk that many firms still try to manage in spreadsheets and inboxes. That is no longer good enough.
This discussion connects the current liability management cycle with how organizations approach material, nonpublic information (MNPI), conflicts, and trading oversight, and explains how clients can use Star’s Compliance Control Room to stay ahead of risk.
How Liability Management Exercises Generate MNPI At Every Step
Liability management exercises take many forms: distressed exchanges, uptiering and priming transactions, maturity extensions, drop down structures, and various “amend and extend” packages. Viewed from a credit lens, they are a way to buy time, preserve enterprise value, or move specific creditor groups up or down the capital structure.
From an MNPI lens, they are information events. Well before any public announcement, a small circle of banks, sponsors, lawyers, and selected lenders may be working with detailed projections, restructuring scenarios, draft term sheets, and proposed new money tranches. That work typically includes:
- Forward-looking cash flow and liquidity analysis
- Valuation scenarios and recovery estimates by instrument
- Proposed ranking and collateral changes across the stack
- Anticipated rating actions and default classifications
None of this is in the public domain. Yet employees across the firm may still be active in loans, bonds, credit default swaps, or even equities of the same issuers and sectors.
As the process evolves, the MNPI footprint widens:
- Ad hoc and steering committees are formed among lenders, each with different information rights.
- Market soundings and wall crossings bring new investors “over the wall” so that the arranging bank can test appetite for different structures.
- Consent solicitations and exchange offers are drafted and circulated under non-disclosure agreements and “big boy” letters.
- Repeat restructurings have become more common; PitchBook notes that roughly one in four companies using liability management tools has done so more than once.
By the time a default or distressed exchange is finally recorded in the index, hundreds of people across multiple firms may have had access to some form of nonpublic information. For compliance, the real risk lives in the weeks and months before that data becomes visible in any market statistic.
Why This Cycle Is Especially Challenging For Control Rooms
The current European leveraged loan environment adds a few extra twists:
- The share of loans trading at distressed prices has climbed above 5%, the highest since mid-2023, which means more names are “in play” at any given moment. (Pitchbook)
- The volume of loans with very low ratings is at its highest level in years, while downgrades continue to outpace upgrades. (Pitchbook)
- Liability management exercises now account for a growing share of overall default activity as interest rates remain elevated. (Pitchbook)
Translated into control room language, this means:
- More issuers sitting in a grey zone between “healthy” and “formally distressed”
- More private-side conversations about options, even before public default events
- More repeat restructurings, with employees crossing the wall on the same name multiple times over several years
If your MNPI and conflict management processes were built for a world of occasional, large, public takeovers, they will struggle in a market where the main story is ongoing balance sheet repair.
Where MNPI Shows Up In Liability Management And What Can Go Wrong
There are four recurring MNPI pressure points in liability management work.
1. Early Credit Work And Mandate Discussions
Internal credit committees, origination teams, and sponsors may work through different restructuring paths well before outside lenders are approached. Firm trading desks and portfolio managers may still be active in the name during this period. Without a structured way to capture when MNPI is created and who has access, it is easy for someone to trade on information that should have triggered a restriction.
2. Market Soundings And Selective Wall Crossing
When deal teams begin to sound out key investors about willingness to participate in a distressed exchange or new money tranche, the firm is explicitly generating MNPI. Each wall crossing should have a clear record of who was contacted, what was shared, when access changed, and what approvals were given. Without that, firms risk inconsistent treatment across investors and poor documentation if regulators ask later.
3. Complex Capital Structure Trades
Liability management often changes the relative position of loans, bonds, and other instruments. A desk that holds instruments at different levels of the stack could be tempted to trade around the expected outcome once they know which part of the capital structure is favored. MNPI is not just about the single security being restructured; it also includes how different pieces of the same capital structure will be affected.
4. Repeat Transactions And Cross Border Teams
As PitchBook points out, a significant percentage of companies using liability management tools are not first-time users. Over time, you can end up with overlapping groups of insiders, partial walls, and legacy restrictions that have not been revisited. Add cross border teams in Europe, the United States, and the United Kingdom, each under their own Market Abuse Regulation regimes, and it becomes very easy to lose track of who should be treated as inside on which name.
The MNPI Compliance Handbook
How Clients Can Use Compliance Control Room To Stay Ahead Of The Curve
This is exactly the kind of environment Star’s Compliance Control Room was designed for. Our view has always been that MNPI management is not just about a static watch list; it is about giving compliance a central, real-time view of the firm’s sensitive activity and the people and entities connected to it.
Here are a few practical ways clients are using Compliance Control Room in the current cycle.
1. Treat Liability Management As A Distinct Project Type
Control Room can capture deal and project data from your existing deal management and customer relationship management systems and bring it into a single platform. You can define liability management as a project category, associate it with specific issuers, facilities and instruments, and then map all related contacts, deal teams and external advisers to that project.
That means when someone in sales, trading, research or the investment team looks at a name, compliance can see immediately whether there is an active liability management project and what that implies for their ability to trade or publish.
2. Capture MNPI As It Is Created, Not Weeks Later
Compliance Control Room and our MNPI Management tools make it simple for employees to report material, nonpublic information from their own portal and attach it directly to specific projects. As wall crossings are approved or new information is shared under a non-disclosure agreement, the system updates internal insider lists with:
- The identity of each person who now has access
- The reason they were added
- The date and time they became an insider
This approach aligns with Market Abuse Regulation requirements and replaces the spreadsheet habit with a controlled, auditable process.
3. Automate Watch And Restricted List Management Across Loans, Bonds and Equities
Once a project is created and MNPI is attached, Control Room can maintain global watch and restricted lists in one place and automatically update them as the project evolves.
The real power comes from integration. By linking Compliance Control Room and MNPI Management with your order management, trading and employee compliance systems, the firm can:
- Prevent or flag employee trades in affected loans, bonds, derivatives and equities
- Monitor firm trading and customer activity in names on the watch or restricted lists
- Keep research from publishing on issuers where the firm is on the private side
Instead of checking multiple systems manually, compliance gets a single view of activity against the watch and restricted lists.
4. Systematize Wall Crossing, Market Sounding And Documentation
Liability management exercises generate a lot of paperwork: non-disclosure agreements, market sounding records, “big boy” letters and side letters. Our solutions allow firms to handle wall crossing and market sounding approvals through a structured workflow, attach all relevant documents to the project, and monitor trading before and after employees come over the wall.
If regulators or internal audit later want to know who was sounded, who accepted or declined, and what happened in the market around those dates, that history is already in one place.
5. Use Enterprise Conflict Checking To See The Full Picture
Compliance Control Room includes enterprise conflict checking that surfaces potential conflicts quickly across deals, employees and related parties and gives you access to key information throughout the deal life cycle.
In the liability management context, that means you can identify when:
- One team is advising a sponsor while another manages money for lenders in the same capital structure
- An employee sits on an external credit committee or advisory board connected to the issuer
- The firm has research coverage, derivatives exposure and lending relationships that all converge on the same distressed name
Those are exactly the situations where MNPI, conflicts and trading risks intersect.
A Closing Thought: Defaults Are A Lagging Indicator, MNPI Is Not
The combined default rate that PitchBook reports, 2.15% once liability management exercises and distressed exchanges are included, is backward looking. The real compliance risk arises earlier, when the first conversations about liability management begin and your people start to cross the wall.
If your control room and MNPI processes are still built on manual lists and disconnected systems, this is a good moment to step back and ask whether they match the complexity of today’s credit markets.
Star’s Compliance Control Room and MNPI Management solutions are designed to give you one central, auditable system of record for MNPI, conflicts, and trading oversight in exactly this kind of environment.
To learn more about how Star can support your employee and firm compliance, click [HERE] to book a demo.
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