February 12, 2020 - We’ve been closely following a case, Kirschner v. JP Morgan, which raises the issue of whether broadly syndicated term loans (“BSLs”) are subject to the securities laws. As part of that exercise, we’ve been digging into the possible ramifications if a court were to rule that they were. A recent article in Bloomberg, although unrelated to our issue, highlights one of the possible outcomes that we’ve been tracking. i.e., that applying the securities laws to BSL loans could cause a significant migration to the direct lending market.
The article describes how a $1.1 billion syndicated loan to ACProducts that had been underwritten by a major bank was ultimately executed instead as a direct loan organized by KKR. While there were many reasons the borrower switched to a direct loan Bloomberg notes that doing the direct loan “would eliminate the need for a bond, which would have burdened the company with additional disclosures…”. (Notably, the borrower was willing to switch even though it remained on the hook for a substantial portion of the fees related to the original deal). If BSL loans were subject to the securities laws, the type of disclosure that apparently helped dissuade ACProducts from moving forward here would be required for the origination, distribution and trading of all BSL loans. One of the concerns raised by market participants when contemplating the Kirschner litigation is that a decision that BSL loans are subject to the securities laws would result in a significant migration to the non-bank “direct lending” market. In many cases borrowers simply cannot produce the types of information required for securities-level disclosure and, even where they could, such disclosure is very expensive, time consuming and cumbersome. Given the choice between the costs and burden of disclosure would even those borrowers who could access this market might take the easier path? Since direct lending loans would arguably not be subject to the securities laws they would be more accessible to the former group and more attractive to the latter. We will continue to closely monitor the Kirschner litigation and identify additional issues as they emerge.