October 26, 2021 - by Elliot Ganz. Last week, Senator Elizabeth Warren introduced legislation, the “Stop Wall Street Looting Act of 2021” ( the “SWSLA”) that primarily targets the private equity market. However, the SWSLA also includes a provision that would re-impose risk retention on managers of CLOs and changes to the bankruptcy code that would negatively impact secured creditors. The legislative text of the SWSLA is available here and an executive summary is available here.
What is in the SWSLA? The bill primarily targets private equity. For example, it would make PE firms jointly and severally liable for the obligations of their portfolio companies, limit post-acquisition dividends and distributions to PE sponsors, limit the deductibility of interest on acquisition debt, close the “carried interest” loophole and impose disclosure obligations and fiduciary duties on PE firms.
How would the bill specifically impact loans and CLOs? Title VI of the bill, “Restrictions on Securitizing Risky Corporate Debt” would amend Section 15G of the Securities Exchange Act of 1934 (Section 941 of the Dodd-Frank Act) by defining managers of CDOs (which would include CLOs) as a specific category of “securitizers”. This would effectively re-impose risk retention on managers of CLOs, requiring managers to purchase and hold 5% of the fair value of CLOs they manage. Title III of the bill, “Protecting Workers When Companies Go Bankrupt” would, among other things, increase the priority of certain unpaid wages, severance payments, contributions to employee benefit plans, and state and federal claims, to administrative claims, thereby diluting the priority and value of senior secured claims that collateralize loans. The bill would also impose a “surcharge” on the value of collateral held by secured creditors. Importantly, these changes would apply to all secured loans, not only those related to private equity sponsored funds.
What is likely to happen now? With Senate Democrats holding the barest of majorities (50/50 with the Vice President breaking ties), and given the Senate’s focus on infrastructure, reconciliation, and many other matters, the SWSLA is unlikely to get much immediate traction. Nevertheless, because the stakes are so high, it will be important to vigorously advocate in opposition to the risk retention and bankruptcy provisions of the bill.
Bottom Line. The leveraged loan market finances the growth of American companies and the millions of jobs that come with it. The loan market performed well not only through the Great Financial Crisis but also through the recent pandemic and federal regulators have repeatedly noted that leveraged loans and CLOs are not systemically risky. Re-imposing risk retention on CLOs, a securitization product with a 30-year track record of success, or unilaterally impairing the value of loan collateral without thoughtful deliberation would be costly mistakes.