Market trends toward board flipping
Multiple rounds of amendments and forbearances, often without a viable path to repayment, have pushed some creditors to reassess their tolerance for delay—and to act decisively. Per Lincoln’s conversations with credit leaders, three key market trends have led to growing frustration within lending groups to drive this shift:
| A slowdown in mergers and acquisitions (M&A) activity reduces exit opportunities and prolongs distress holding patterns |
| Diminished sponsor capacity to inject additional equity—often due to fund level constraints or other investment priorities—can lead to misalignment with creditors and reluctance to act |
| Increasing reliance on creditors to provide liquidity places a heavier burden on creditors while exposing investments to greater risk |
These dynamics have shifted creditor perspectives, leading many to reconsider their patience for delayed resolutions and embrace proactive measures. Lincoln has observed creditors increasingly leveraging proxy voting rights to expedite governance changes and drive more strategic alternatives and outcomes.
Understanding the mechanics of proxy voting rights
In most secured credit arrangements, the borrower’s equity is pledged to lenders as collateral. Under normal circumstances, this pledge does not interfere with the sponsor’s voting rights. However, upon a default, the collateral agent—acting on behalf of the required lenders—may exercise the pledged rights to appoint new board members at the borrower or its subsidiaries.
The mechanics of effectuating a board transition can move swiftly. Depending on lenders’ level of preparedness and risk tolerance, a new board can be installed within a matter of weeks. In some cases, sponsors receive notice simultaneously with the board change, underscoring the urgency and surprise often associated with these actions.
Implications for sponsors
Once a board flip occurs, the sponsor retains its equity stake but loses nearly all operational and strategic control. The authority to appoint directors, engage advisors, initiate sale / refinancing processes and evaluate bids—even those below the level of the existing debt—rests entirely with the new board, typically composed of independent directors who are more likely to look to maximize value for all stakeholders, not just the equity. Moreover, the sponsor’s ability to use Chapter 11 as a negotiating tool is effectively neutralized, and recent case law (e.g., In re CII Parent, Inc., 2023) has shown board changes made via board flipping are rarely reversible, even in bankruptcy.
Given these implications, it is essential that sponsors act early at the first signs of distress. Engaging constructively with creditors prior to any covenant breach can preserve optionality—whether through an amendment, forbearance, or a broader restructuring solution. Once a default occurs without a cure and governance rights shift, a sponsor’s leverage is significantly reduced.
Lincoln’s differentiated value
Lincoln’s deep connectivity and credibility with private credit lenders uniquely position us to support sponsors through complex negotiations. Whether helping negotiate amendments where lenders want to change notice periods, working proactively to avoid a board flip or intervening in situations where control has already shifted, Lincoln facilitates collaborative solutions that seek to maximize recoveries for all stakeholders. Our proprietary database of amendment terms and extensive restructuring experience enable us to navigate these negotiations efficiently and strategically. Reach out today to ensure your path forward maximizes recovery and preserves value.
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