April 27, 2023 - This week, the LSTA and DealCatalyst are hosting a thousand market participants at the Annual Private Credit Conference (now in Ft. Lauderdale). While deal-doings and enlightenment are being enjoyed by all, the conference also provided an opportunity for LSTA ED Lee Shaiman to reiterate the LSTA’s broader mission, its role in Private Credit and the LSTA’s (and Private Credit’s) near-term policy imperatives.
First, why Private Credit? The reality is that opportunities and challenges in leveraged lending do not shift sharply at the border of four or five or seven lenders. Both BSL and Private Credit are senior secured floating rate instruments – offering the (clear) inflation hedging, (moderately) lower volatility and (ideally) higher recovery that these features imply. At somewhere north of $1.3 trillion in AUM each, they are roughly equal in size. And both borrowers and lenders frequently cross and recross the borders of BSL and Private Credit, depending on their needs. Thus, rather than two markets, they appear to be one market with two strategies. Opportunities abound.
But both markets also share a challenge in increased scrutiny from Washington. Leveraged finance of all flavors appears to be a preferred target for regulators looking to expand their already hot war on private equity. The SEC moved aggressively last year with an unprecedented and extensive rule-making proposal aimed at private funds, which are intentionally and statutorily exempted from disclosure and reporting requirements imposed on public entities. The SEC also recently issued proposed rules on conflicts in securitizations, outsourcing and custody – all of which also impinge upon the Private Credit space. Focus is not limited to the SEC; Treasury Secretary Yellen recently stated that, “We must also address vulnerabilities in the nonbank sector. Some nonbanks or “shadow banks” consist of financial companies that carry out traditional banking functions, but are outside of, or only loosely linked to, depository institutions.” So, the regulators are watching (and acting), and the LSTA is engaging, across the spectrum of leveraged lending. We have a demonstrated ability to educate and inform key members of the House Financial Services Committee, and the Senate Banking and Judiciary Committees; this has been critical to the prospects for the corporate loan and CLO markets. We also confer regularly with officials within the Treasury, the Federal Reserve, the OCC, the FDIC, and the SEC. More tangibly, we are engaged on many fronts, providing commentary and comment letters to the regulators on issues ranging from ESG rules to Private Funds Disclosure to Custody to Kirschner to Conflicts to Outsourcing and more. There is a wealth of regulatory challenges in the leveraged loan space – be it in BSL or Private Credit garb – and the LSTA stands ready to tackle them on behalf of the industry.