The Intercreditor Drag as a Restructuring Tool – Considerations and Challenges 

January 2026

European Restructuring Activity:
2025 and 2026 Projections 

Hover to find out more

EY/Parthenon

The European market is seeing a rise in the use of aggressive liability management exercises (LMEs) to implement restructurings. Recent examples include Selecta, Hunkemöller, Ardagh and Altice France.

One implementation tool that has been used in several recent high-profile European LMEs is the distressed disposals mechanism in English law-governed intercreditor agreements (ICAs). ICA distressed disposal or “intercreditor drag” provisions offer a contractual route to implement LMEs with lower consent thresholds, less publicity and greater execution speed than UK schemes and restructuring plans or US Chapter 11 proceedings. 

In this article, we discuss two restructurings that took advantage of the intercreditor drag (Selecta and Hunkemöller) and the ongoing challenges in relation to them.

The European market is seeing a rise in the use of aggressive liability management exercises (LMEs) to implement restructurings. Recent examples include Selecta, Hunkemöller, Ardagh and Altice France.

One implementation tool that has been used in several recent high-profile European LMEs is the distressed disposals mechanism in English law-governed intercreditor agreements (ICAs). ICA distressed disposal or “intercreditor drag” provisions offer a contractual route to implement LMEs with lower consent thresholds, less publicity and greater execution speed than UK schemes and restructuring plans or US Chapter 11 proceedings. 

European Restructuring Activity: 2025 and 2026 Projections 

Click to find out more

EY/Parthenon

In this article, we discuss two restructurings that took advantage of the intercreditor drag (Selecta and Hunkemöller) and the ongoing challenges in relation to them.

Selecta 

In June 2025, Swiss vending machine operator Selecta executed a comprehensive recapitalisation through one of the more aggressive LMEs seen in Europe. The transaction involved a new money injection of €330m, a reduction of over €1bn of debt, and a transfer of Selecta’s equity to existing lenders and new money providers. The transaction was driven by an ad hoc group of cross-holders who held positions in both the company’s first lien (1L) and second lien (2L) notes.

Using the distressed disposals mechanics in the ICA to enforce a Dutch share pledge, the restructuring was implemented with the support of the ad hoc group, bypassing the higher consent thresholds that would be required for a UK scheme or restructuring plan. The distressed disposal was used to transfer Selecta from its existing parent to a new parent entity in exchange for a release of debt. All 1L notes were replaced with subordinated third-out (3O) notes but the ad hoc group then conducted a private exchange into first-out (1O) notes which benefited from enhanced priority. Creditors outside of the ad hoc group could only participate in this exchange if they released all of their existing claims. Following the restructuring, the split in value was clear, with the 1O Notes trading at c.75 cents and the 3O Notes trading at c.20 cents. 

One of the more controversial aspects of the restructuring was the absence of any sacred rights in the new 1O Notes for the first 12 months, enabling a further aggressive LME to the detriment of creditors outside the ad hoc group.

THE DISTRESSED DISPOSAL WAS USED TO TRANSFER SELECTA FROM ITS EXISTING PARENT TO A NEW PARENT ENTITY IN EXCHANGE FOR A RELEASE OF DEBT

Selecta 

In June 2025, Swiss vending machine operator Selecta executed a comprehensive recapitalisation through one of the more aggressive LMEs seen in Europe. The transaction involved a new money injection of €330m, a reduction of over €1bn of debt, and a transfer of Selecta’s equity to existing lenders and new money providers. The transaction was driven by an ad hoc group of cross-holders who held positions in both the company’s first lien (1L) and second lien (2L) notes.

Using the distressed disposals mechanics in the ICA to enforce a Dutch share pledge, the restructuring was implemented with the support of the ad hoc group, bypassing the higher consent thresholds that would be required for a UK scheme or restructuring plan. The distressed disposal was used to transfer Selecta from its existing parent to a new parent entity in exchange for a release of debt. All 1L notes were replaced with subordinated third-out (3O) notes but the ad hoc group then conducted a private exchange into first-out (1O) notes which benefited from enhanced priority. Creditors outside of the ad hoc group could only participate in this exchange if they released all of their existing claims. Following the restructuring, the split in value was clear, with the 1O Notes trading at c.75 cents and the 3O Notes trading at c.20 cents. 

THE DISTRESSED DISPOSAL WAS USED TO TRANSFER SELECTA FROM ITS EXISTING PARENT TO A NEW PARENT ENTITY IN EXCHANGE FOR A RELEASE OF DEBT

One of the more controversial aspects of the restructuring was the absence of any sacred rights in the new 1O Notes for the first 12 months, enabling a further aggressive LME to the detriment of creditors outside the ad hoc group.

LME Share of European
Payment Defaults (2020-2025)

Pitchbook

Hunkemöller

In June 2024, a creditor group led by Redwood Capital provided a €50m super senior loan to Hunkemöller International. In exchange, €186m of Hunkemöller’s existing notes held by Redwood were elevated into priority first-out secured notes ranking ahead of the remaining €86.5m of notes held by other creditors. This was followed by the introduction of a double LuxCo structure above the existing restricted group and the grant of a share pledge in favour of the secured creditors.

Subsequently, in March 2025, Redwood instructed the trustee to enforce the newly created share pledge. Using the distressed disposals provisions in the ICA, shares of the Luxembourg holding company were transferred to a BidCo controlled by Redwood and the release provisions in the intercreditor agreement were used to release the claims and security of the original noteholders. Unlike in Selecta, no court approval was sought for the transfer. 

Hunkemöller

In June 2024, a creditor group led by Redwood Capital provided a €50m super senior loan to Hunkemöller International. In exchange, €186m of Hunkemöller’s existing notes held by Redwood were elevated into priority first-out secured notes ranking ahead of the remaining €86.5m of notes held by other creditors. This was followed by the introduction of a double LuxCo structure above the existing restricted group and the grant of a share pledge in favour of the secured creditors.

Subsequently, in March 2025, Redwood instructed the trustee to enforce the newly created share pledge. Using the distressed disposals provisions in the ICA, shares of the Luxembourg holding company were transferred to a BidCo controlled by Redwood and the release provisions in the intercreditor agreement were used to release the claims and security of the original noteholders. Unlike in Selecta, no court approval was sought for the transfer. 

LME Share of European
Payment Defaults (2020-2025)

Pitchbook

The Challenge Landscape 

One of the downsides to implementing restructuring transactions through out-of-court processes such as the intercreditor drag is the litigation risk following the execution of the transaction, particularly in the case of cross-border transactions where challenges may be brought across a number of jurisdictions.

Selecta 

A group of Selecta’s creditors (outside of the ad hoc group) has brought a challenge in New York against both Selecta and the ad hoc group, alleging that their LME unlawfully subordinated their debt and stripped their rights. The grounds of the complaint are under New York and English law and include, amongst others: 

  • The cooperation agreement entered by the ad hoc group constitutes collusion among competing noteholders to control the market for the notes, inflating the value of the ad hoc group’s notes subject to the agreement whilst depressing the value of the other notes. 
  • Breach by Selecta of the 1L indenture for failing to pay principal and interest to noteholders rateably following enforcement, and unlawful substitution of debt. 
  • Tortious interference by the ad hoc group by using their majority position to induce Selecta to breach its obligations under the notes documents. 
  • Breach of fiduciary duty by Selecta’s directors and breach of minority protection principles under English law. 

Selecta and the ad hoc group have notified the New York court that they intend to file a motion to dismiss – it is expected this will be filed by the end of January 2026.

ONE OF THE DOWNSIDES TO IMPLEMENTING RESTRUCTURING TRANSACTIONS THROUGH OUT-OF-COURT PROCESSES, SUCH AS THE INTERCREDITOR DRAG, IS THE LITIGATION RISK FOLLOWING THE EXECUTION OF THE TRANSACTION

Several noteholders have also filed annulment proceedings in the Dutch courts, seeking to void the enforcement of the Dutch share pledge as part of the distressed disposal based on alleged procedural irregularities. 

Most striking amongst the grounds is the challenge to the co-op agreement on anti-trust grounds – any ruling by a New York court against co-op agreements on such grounds would send shockwaves through the restructuring world, given their prevalence in recent years.

Hunkemöller

The primed creditors of Hunkemöller have challenged the up-tiering transaction in New York, with the following grounds surviving a motion to dismiss in July 20251.

  • The issuance of the new first-out notes constituted a payment for consent to amend the indenture, thereby contravening the payments for consent provision requiring such payments to be made pro rata.
  • The purported removal of the payments for consent provision before the uptier was invalid because Redwood received consideration for agreeing to this in the form of the benefits received as part of the broader transaction. 
  • Redwood was the beneficial holder but not the registered holder of its notes. Without the consent of the registered holder, its consent alone was insufficient to approve the removal of the payments for the consent provision or the uptier.
  • The new first-out notes were not validly issued under the indenture as they were not on terms substantially identical to the remaining notes – a requirement under the provision permitting further issuances. 
  • The issuance of the new first-out notes following the cancellation of Redwood’s original notes breached the indenture because the indenture prohibited Hunkemöller from issuing new notes to replace notes that it had redeemed or delivered to the notes trustee for cancellation.
  • If the transaction were deemed an exchange rather than a redemption, it was in breach of the indenture because the indenture required any exchanged notes to provide the same benefits as the original notes. 

The primed creditors have also brought discovery proceedings in the Netherlands, Luxembourg and the United States District Court for the Southern District of New York.

More recently, the primed creditors have brought proceedings in England challenging the sale to Redwood that was effected through the use of distressed disposals provisions in the ICA. The key grounds on which the primed creditors seek to challenge the transactions, and the security agent’s defences, are as follows: 

MOST STRIKING AMONGST THE GROUNDS IS THE CHALLENGE TO THE CO-OP AGREEMENT ON ANTI-TRUST GROUNDS – ANY RULING BY A NEW YORK COURT AGAINST CO-OP AGREEMENTS ON SUCH GROUNDS WOULD SEND SHOCKWAVES THROUGH THE RESTRUCTURING WORLD, GIVEN THEIR PREVALENCE IN RECENT YEARS

  • The issuance of the new first-out notes constituted a payment for consent to amend the indenture, thereby contravening the payments for consent provision requiring such payments to be made pro rata.
  • The purported removal of the payments for consent provision before the uptier was invalid because Redwood received consideration for agreeing to this in the form of the benefits received as part of the broader transaction. 
  • Redwood was the beneficial holder but not the registered holder of its notes. Without the consent of the registered holder, its consent alone was insufficient to approve the removal of the payments for the consent provision or the uptier.
  • The new first-out notes were not validly issued under the indenture as they were not on terms substantially identical to the remaining notes – a requirement under the provision permitting further issuances. 
  • The issuance of the new first-out notes following the cancellation of Redwood’s original notes breached the indenture because the indenture prohibited Hunkemöller from issuing new notes to replace notes that it had redeemed or delivered to the notes trustee for cancellation.
  • If the transaction were deemed an exchange rather than a redemption, it was in breach of the indenture because the indenture required any exchanged notes to provide the same benefits as the original notes. 

The primed creditors have also brought discovery proceedings in the Netherlands, Luxembourg and the United States District Court for the Southern District of New York.

MOST STRIKING AMONGST THE GROUNDS IS THE CHALLENGE TO THE CO-OP AGREEMENT ON ANTI-TRUST GROUNDS – ANY RULING BY A NEW YORK COURT AGAINST CO-OP AGREEMENTS ON SUCH GROUNDS WOULD SEND SHOCKWAVES THROUGH THE RESTRUCTURING WORLD, GIVEN THEIR PREVALENCE IN RECENT YEARS

More recently, the primed creditors have brought proceedings in England challenging the sale to Redwood that was effected through the use of distressed disposals provisions in the ICA. The key grounds on which the primed creditors seek to challenge the transactions, and the security agent’s defences, are as follows: 

Breach of the Abuse Principle 

The primed creditors’ core argument is that the instruction of the security agent to enforce the security granted by Hunkemöller and effect the transfer of the equity of the group to Redwood was a breach of “abuse principle”, an established principle of English law that where a majority is empowered to bind a minority, the majority must exercise this power in good faith, for the benefit of the class as a whole2. They argue that this principle is implied into the ICA and was contravened by Redwood exercising its powers under the ICA in a manner that was only in its interests, rather than those of the senior secured creditors as a whole.

The security agent denies that the abuse principle should be implied into the ICA because such an implied term would be inconsistent with terms which expressly oblige the security agent to act on the instructions of the “Instructing Group” if the express requirements under the ICA are complied with. Furthermore, it denies that the abuse principle (if it was implied into the ICA) was infringed because, amongst other things, the assets transferred to Redwood were transferred for a value above that specified in a valuation report obtained by the security agent, and the disposal resulted in a return to the holders of the senior secured notes despite those notes being entirely out of the money, even if that return flowed only to holders of the first-out notes.

THE PRIMED CREDITORS’ CORE ARGUMENT IS THAT THE INSTRUCTION OF THE SECURITY AGENT TO ENFORCE THE SECURITY GRANTED BY HUNKEMÖLLER...WAS A BREACH OF THE “ABUSE PRINCIPLE”

Invalidity of Instructions Given to The Security Agent 

The primed creditors further contend that the security agent was improperly instructed, including on the basis that the new first-out notes issued to Redwood were invalid, and that the security agent knew (or deliberately turned a blind eye to the fact) that both the validity of those first-out notes and Redwood’s status as a “Senior Secured Creditor” under the ICA were disputed at the time the distressed disposal was carried out.

The security agent has resisted this contention on multiple grounds. It maintains that the issuance of the new first-out notes was valid as a matter of New York law. The security agent further contends that, even if the issuance of the new first-out notes constituted a breach of the indenture, it does not necessarily follow that the up-tiering transaction should be invalidated, particularly where the primed creditors seek monetary damages or the new first-out notes are offered to all holders of the original notes.

In the alternative, the security agent submits that if the up-tiering transaction is invalidated, Redwood would be restored to its original position as the holder of approximately 68.3% of the original notes, giving it a sufficient holding to direct enforcement action. It also asserts that it was entitled to assume the validity of, and act in accordance with, enforcement instructions received from the indenture trustee (as the creditor representative for the senior secured creditors) without enquiry as to whether it was acting in accordance with the instructions of the requisite majorities under the indenture.

Regardless of the outcome, the English court’s judgment is likely to be highly influential in shaping the legal boundaries of liability management transactions in the European market. 

THE PRIMED CREDITORS FURTHER CONTEND THAT THE SECURITY AGENT WAS IMPROPERLY INSTRUCTED, INCLUDING ON THE BASIS THAT THE NEW FIRST-OUT NOTES ISSUED TO REDWOOD WERE INVALID

The Inter-Creditor Drag Framework 

  • A distressed disposal is usually defined as the disposal of the shares or assets of an obligor at the request of an “instructing group” following a default. 
  • The instructing group is usually defined as over 50% or 66⅔% of total senior secured commitments. This threshold is significantly lower than the amendment threshold for “sacred rights” in European bond documents and affected lender/super-majority lender consent thresholds in European leveraged loans. It is also lower than the threshold for approval of a scheme or restructuring plan.
  • Where there is super senior debt in the structure, the ability for the instructing group to instruct a distressed disposal will usually be subject to a consultation period with super senior creditors, which can be waived by over 50% or 66⅔% of total super senior commitments3. 

The Inter-Creditor Drag Framework 

  • A distressed disposal is usually defined as the disposal of the shares or assets of an obligor at the request of an “instructing group” following a default. 
  • The instructing group is usually defined as over 50% or 66⅔% of total senior secured commitments. This threshold is significantly lower than the amendment threshold for “sacred rights” in European bond documents and affected lender/super-majority lender consent thresholds in European leveraged loans. It is also lower than the threshold for approval of a scheme or restructuring plan.
  • Where there is super senior debt in the structure, the ability for the instructing group to instruct a distressed disposal will usually be subject to a consultation period with super senior creditors, which can be waived by over 50% or 66⅔% of total super senior commitments3. 

Powers of the security agent: Upon a distressed disposal directed by the instructing group, the security agent can: 

  • release security over the assets of an obligor; 
  • where shares in an obligor are being disposed of:
  • release the obligor from its borrowings, guarantees and intra-group liabilities 
  • release transaction security over the shares 
  • release claims of junior creditors and intra-group lenders against the obligor 
  • Instead of releasing liabilities owed by the obligor, transfer or sell those liabilities along with the assets in the obligor, which is more favourable from a tax perspective than a write-off of claims against the obligor.

Value Maximisation:

ICAs usually require security agents to “take reasonable care to obtain a fair market price in the prevailing market conditions”. Compliance with this obligation can be established where the ICA may require that:

  • the sale is made under proceedings approved or supervised by any court of law 
  • the sale is made under the control of an insolvency officer 
  • the sale is made pursuant to a competitive sales process, including a public auction; or 
  • a financial officer, investment bank, or accountant delivers an opinion stating that the proceeds received are fair from a financial point of view, taking into account all relevant circumstances. 
  • Even where a competitive sales process is undertaken, existing creditors are likely to have a significant informational advantage and will more quickly be able to assess value compared with third-party bidders. 

Form of Consideration & Waterfall:

  • Most ICAs will provide that where a disposal has been conducted through a competitive sales process or where a fairness opinion is obtained, distressed disposals can be transacted for non-cash consideration. This enables creditors to credit bid their existing debt, and for take-back debt to be issued as consideration for the distressed disposal.
  • Even where the ICA requires that consideration is to be paid in cash, creditors who are entitled to receive such cash consideration may still elect to set off their entitlement to sale proceeds against the amounts they are required to fund in respect of their new money commitments4. 
  • While the proceeds received from the disposal are required to be applied in accordance with the waterfall in the ICA, the terms of the take-back debt can be formulated by the supporting creditors and the issuer, provided the consideration rendered meets the fairness test. This allows them to alter matters which would otherwise be “sacred rights” or amendments requiring affected lender/super-majority lender consent. They can also include terms to facilitate subsequent LMEs, which are accretive to the supporting creditors (e.g., more limited sacred rights, no requirement for pari passu treatment across all lenders/bondholders), as occurred in Selecta. 
  • Given the absence of court oversight, there is an additional degree of flexibility around fees that can be paid to supporting creditors/new money providers as part of the restructuring, provided these are not structured as consideration for the distressed disposal, which will be subject to the pro rata/loss sharing provisions. 

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