A trade group representing the $1.4 trillion leveraged loan market is urging US Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and other agency heads to back the status quo of excluding loans from securities laws.
(Bloomberg) — A trade group representing the $1.4 trillion leveraged loan market is urging US Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and other agency heads to back the status quo of excluding loans from securities laws.
The LSTA, an industry group for syndicated corporate loans, penned a letter this week warning that defining loans as securities could affect market liquidity and raise costs for corporate borrowers, who are already wrestling with higher interest rates after the Fed’s most aggressive monetary tightening in a generation.
“These increased costs and heightened regulatory uncertainty would come at precisely the wrong time for the domestic economy and the borrowers that depend on access to the syndicated term loan market,” the LSTA said in a letter signed by Elliot Ganz, the group’s head of advocacy.
The letter comes at a crucial moment for the industry, with the Securities and Exchange Commission set to deliver an opinion on the matter by the end of June in a court case centered on the categorization of leveraged loans. The court’s final decision stands to have sweeping consequences for the market, leading the LSTA to seek input from potentially more sympathetic agencies than the investor-focused SEC.
The LSTA’s letter was addressed to Yellen, Powell, Acting Comptroller of the Currency Michael Hsu and Federal Deposit Insurance Corp. Chairman Martin Gruenberg.
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Spokespeople for the Fed, Treasury and FDIC declined to comment. Representatives for the OCC and SEC didn’t reply to requests for comments.
Debate Over Definitions
Leveraged loans are a tool used by corporations to borrow money in credit markets. Decades ago, banks often provided this type of lending, but over time, that migrated into selling leveraged loans to a broad group of institutional investors.
Today, leveraged loans resemble the high-yield bond market. In both cases, banks arrange the debt for sale to dozens or hundreds of asset managers. High-yield bonds are securities and subject to additional rules and disclosures, but loans are considered contracts and therefore avoid that additional scrutiny.
The definition of loans is coming to a head amid a long-running court battle, Kirschner v JPMorgan. The case centers on a $1.8 billion 2014 leveraged loan gone wrong and asks whether investors in the market deserve protections similar to those provided to buyers of high-yield bonds.
Judges in that case made a surprise decision three months ago to ask the SEC to submit its view on the matter. The SEC has never previously given such a view.
The LSTA’s letter reflects concern that the SEC’s investor-focused mandate could lead to a change in the status quo, according to Arthur Wilmarth, professor emeritus at George Washington University Law School. The LSTA emphasized the importance of market stability in its comments, warning that an overhaul of current market arrangements stands to spur volatility.
“The LSTA probably views the SEC as somewhat adversarial,” said Wilmarth, who has taught courses in banking law, contracts and professional responsibility. “The SEC is focused heavily on investor protection, whereas the bank regulators are more sensitive to issues and changes that would affect the profitability and strength of banks.”
Last week, the court overseeing the case denied a request by JPMorgan’s lawyers to have the Fed, Treasury, OCC and FDIC weigh in on the matter.
–With assistance from Paula Seligson, Katanga Johnson and Viktoria Dendrinou.
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