September 22, 2022 - Today, the LSTA is hosting its first live Annual Conference since 2019. We want to thank all our attendees and sponsors that made it happen. So that all our members can participate vicariously – albeit in limited fashion – we provide links to the presentation slides here and below offer a recap of LSTA Executive Director Lee Shaiman’s welcome address.
To Begin, Gratitude: We begin with a thank you to our Board of Directors, including all those past and present who served during the pandemic. They helped guide us through the extraordinary challenges of these last few years. We follow with appreciation of the small but mighty LSTA Staff for their hard work and invaluable leadership in organizing and producing today’s conference. Special thanks go to Ted Basta and Lorena Deluca; this event would not happen without their efforts. And, that gratitude extends to the work the LSTA team does on all the issues, large and small, day-in and day-out, in fulfillment of the LSTA’s mission.
The Enduring Mission: The LSTA mission still is to promote a fair, orderly, efficient and growing loan market and to provide leadership in balancing the interests of all market participants in the furtherance of those goals. The past few years have challenged this mission – like they challenged all our preconceptions of work and life. The loan market never stopped in the pandemic; in fact, the needs of the market and our members intensified as a result of the global health crisis and the economic stresses it caused.
Through it all, the LSTA supported our membership through education, advocacy and helping maintain standards. Like our first 25 years, throughout the pandemic we continued to create, maintain and update the critical forms and documents used by the loan market. We collected and analyzed crucial industry data. We assisted members in their interactions with legislators, regulators and the courts. And, increasingly, we did so facing a public skeptical of the financial system.
A Focus on LIBOR Transition: Many of our efforts were in train before – and continued through – COVID. One such example is LIBOR replacement. This has been a critical work stream for us for five years. While LIBOR replacement has been our proverbial “cross to bear”, the results have been worth the effort – as the transition from LIBOR to SOFR demonstrates. In what would have been considered an inconceivable feat a year ago, today, 99% of all new issue loans are originated on SOFR, and there have been no operational meltdowns. As my colleague Meredith Coffey reminds me, this wasn’t just luck. It required a lot of work behind the scenes. The LSTA and others convinced the ARRC of the importance of a term SOFR for the loan market. The ARRC ultimately recommended the term rate; this stands in stark contrast to less operationally friendly alternatives – such as a Daily Compounded SOFR – being implemented in other jurisdictions.
Moreover, the LSTA’s focus on details—our willingness to get in the weeds, the systems, the documents and the math —is the differentiating factor that is making the transition seemingly painless in new lending. But our – and your – work is not over! Remediation of thousands of legacy LIBOR loans, which must happen by June 30, 2023, remains a significant hurdle. A market disruption and borrowers’ unwillingness to give up their LIBOR loans have slowed the inevitable process. We already are working with our members in anticipation of the traffic jam that is likely to occur.
Or Consider ESG: ESG and the consideration of ESG principles that guide borrowers and lenders are a near constant topic of conversation in our market. Under the expert guidance of the LSTA’s Tess Virmani, we are collaborating with many interested parties, as the LSTA works to lead our market forward on this difficult and important issue.
Most critically, we are advancing the availability and reliability of ESG data on our borrowers. In an initiative being highlighted today, we have spearheaded a collaboration with industry partners to harmonize numerous – often competing – ESG disclosure requests to develop a single, standard reporting template useable across credit markets. To meet growing regulatory scrutiny and investor demand on ESG, the time is now to improve this information in our market.
And What of Litigation? A global pandemic might slow the flow of commercial litigation in this country, but nothing can stop it! Arguably finance and financial markets are among the most closely regulated industries in our Republic. And leveraged loans live in a crease between two regulatory regimes: bank regulators and the securities regulators. The courts have long held that, if it meets certain requirements, a loan is not a security. But every few decades an aggrieved party looks for an opportunity to test those boundaries.
Such was the case in the Kirshner litigation. If members are interested in the specifics of the case, the LSTA’s Elliot Ganz has covered it extensively on our website. Last year the district court threw out the plaintiff’s claim that a certain syndicated loan was a security. The LSTA had submitted a brief in that case and did again in the appeal to the federal circuit court. Oral argument is scheduled for this fall. But here’s the bottom line: The issue is critical since the Millennium term loan, the loan in this case, is no different than any term loan in our market, so an adverse decision would have far-ranging, perhaps existential, effects on the loan market. Be assured, LSTA is on the case.
But Kirschner is not the only litigation we face. We also filed amici briefs in the litigation relating to the mistaken payment by the agent bank in the Revlon term loan. And just two weeks ago the Second circuit issued its long-awaited opinion, unanimously vacating the District Court’s decision that allowed the recipients of Citibank’s mistake to keep the money. The appellate court’s decision is a step in reaffirming norms, which are critical to the proper functioning of markets. We supported the agent in its appeal to the second circuit on a market principle. Supporting litigation between LSTA members is not a place we want to be. The circumstances of this case put the LSTA staff, litigation committee and board between the proverbial rock and hard place.
But the fundamental issue here is about market norms and the basic functioning and expectations of market participants in carrying out their roles in a fair, orderly and efficient manner. Many other trade organizations would shy away from such controversy. To be clear, we do not welcome it – but we cannot and will not stay on the sidelines under such circumstances. From our perspective, if we took a side, it was “the loan market’s” side.
Regulation Looms: Private litigation is not the only threat. The SEC, in particular, has been on a regulation raceway. Since January the agency has published dozens of proposed new rules, comprising thousands of pages of regulatory text. We worked closely with members to parse the issues. We then prepared a thoughtful and comprehensive response to the SEC under extraordinarily tight timelines. That response included facts and data rebutting any threat and responding to the SEC’s proposed and burdensome disclosure obligations on advisers of private funds, including CLOs.
We also formally commented on the SEC’s ESG proposals and joined other associations in commenting on issues that touch our markets more tangentially. There has been considerable engagement with the SEC Staff and there will be more. We’ll keep you apprised as these situations develop. But let’s move on to happier topics…
We Do Need Some Education: Timely education of our members regarding the legal, regulatory, operational and fundamental issues of the loan market is a critical component of the LSTA’s mission. This year, the LSTA has conducted dozens of webinars, seminars, podcasts, conferences and symposia, attended by thousands of our members. We conferred over 3,500 CLEs across 17 separate events to our extensive legal community.
And then there is the LSTA University Summer Series. The series has been a great success in educating hundreds of employees of our member firms and has become an important element in preparing the next generation of loan market professionals. But what’s education without a textbook? In January, McGraw-Hill released the second edition of the Loan Syndication and Trading Handbook. This update of the 900-page tome first published 15 years ago was sorely needed; it was a collective effort of the LSTA staff and several dedicated members who contributed. Special thanks go to Bridget Marsh who worked tirelessly to meet the publisher’s deadline.
And Then There’s Docs and Ops: Both of these are critical functions for the market. Every year, our legal and operations professionals draft and publish scores of documents, forms and advisories that help market participants and keep the market functioning.
On the operational side, in addition to quietly helping unstick thousands of trades in the normal course, we will be releasing new LIBOR and SOFR calculators on our website to facilitate cost of carry calculations. We must offer a hat-tip to the many members who have beta-tested these tools for us.
Efficient systems need unique identifiers – period. The LSTA collaborated with CUSIP Global Services to create a much-needed new entity identifier that is web enabled and open source. This initiative can – and should – improve interoperability of user and vendor systems and facilitate greater migration to new digital technologies. More broadly, we have been working with users and vendors to improve the understanding of digital technology and its applications to our market. Ellen Hefferan has created a technology committee to help our market achieve its aspirational goals of improving settlement, reducing errors rates as well as trading friction and transaction costs.
The Future of Events: Like you, we seek to foster a growing, evolving and vibrant loan market. To assist in that we partnered with DealCatalyst, an event manager with deep roots producing events focused on loans and structured finance. This past June we successfully launched the first of what we expect to be many such events. We have two big events scheduled for 2023, a Private Credit and Direct Lending Industry conference in April in Ft. Lauderdale and CLO Industry conference in May in New York. Please support our mission by attending and sponsoring and help grow our market. And if you have questions about anything we covered, please contact Lisa Schneider, who leads our member relationships.
The Final Word: As you can see, we have a lot going on at the LSTA. We have a growing and complex market operating in an aggressive regulatory environment; there is always a lot to do. And this missive has only scratched the surface.