October 4, 2023 - At next week’s LSTA Annual Conference, David Blass (Simpson Thacher), Michael Girondo (TowerBrook), Seth Misshula (Invesco), and Nicole Skalla (Paul Hastings) will unpack that question. Leveraged lending and its market participants have faced repeated regulatory threats over the last two years. First, private funds, including CLOs, faced a new regime of regulation under the proposed Private Fund Disclosure Rules. Next, open-end loan mutual funds and ETFs were targeted in the Liquidity Risk Management Proposed Rules. On the heels of that came a proposed change to the custody of assets in the Safeguarding Proposed Rule. Even presumed-dead rulemakings implementing Dodd-Frank appeared, such as the Conflicts in Securitization Proposed Rule. Finally, the broadly syndicated loan market faced market upheaval when the question of whether term loan Bs were in fact securities was asked of the Second Circuit in the Kirschner case. Indeed, not a corner of leveraged lending was untouched.
Fortunately, some of the biggest threats have been narrowly avoided. First, the Second Circuit affirmed the district court’s decision that term loan Bs are not securities for the purposes of the federal securities laws. Any other decision would have injected massive uncertainty into current market practice and had the potential to cause massive disruption for outstanding TLBs. The Private Fund Disclosure Rules, while still introducing a new and onerous regulatory regime on private funds, including in-scope credit funds, excluded CLOs – a result that the LSTA had strongly advocated for.
But several important proposed rulemakings have yet to be finalized and would impact and change the market as it operates today. If adopted as proposed, the Liquidity Risk Management Proposed Rules call into question how open-end loan funds survive. The current custody regime for loans is at odds with the proposed Safeguarding Rule. The Conflicts in Securitization rulemaking – aimed at preventing the creation of ABS designed to fail – would characterize many regular way CLO (and loan!) activities as conflicts. And new threats are emerging. Last month the International Organization of Securities Commissions (IOSCO) launched a consultation on good practices for leveraged lending and CLOs together with a final report on nonbank finance which purport to view the BSL and private credit markets as posing a systemic risk.
The volume and pace of rulemakings poses the great challenge of understanding what these regulatory changes will mean for lending – What are the compliance costs? Will there be fewer types of lenders? How do regular business practices need to change? What is the impact on capital formation and borrowing costs? Our expert panelists will not have all of the answers, but we will pause and reflect on what the future regulatory environment looks like and what it means for all of us. The agenda (and registration) are available here – please join us!