July 26, 2022 - On Thursday, July 21st, the LSTA’s Meredith Coffey and Elliot Ganz closed out the Summer Series by discussing how policy changes are enacted and how they can affect the loan market. We recap the key takeaways below and offer the replay here and supporting slides here.
There are three major ways regulation and policy changes emerge: Governmental changes (which can come through the legislative branch, the regulators themselves or even through the courts), exogenous factors that suddenly affect the loan market, and third party litigation.
Legislation and regulatory actions are by far the most frequent drivers of policy change in the loan market. In the past, we’ve seen legislation (and subsequent rulemaking) such as risk retention and the Volcker Rule (both part of the Dodd Frank Act) affect CLOs. More recently, the SEC has proposed a rule requiring private funds – including CLOs and commingled funds – to disclose significant information. This rule could have a material impact on the cost of managing CLOs and commingled funds. And in recent months, the NAIC has proposed increasing risk-based capital for insurance company investments in many CLO notes. This could make certain CLO investments less attractive to insurance companies and, thus, impact CLO formation. Because CLOs are the biggest single holder of institutional loans, this may create a knock-on effect in the loan market.
While less frequent than legislative- or regulatory-driven policy changes, exogenous events can create material changes in the loan market as well. The slow disintegration of LIBOR is such a case. While regulators did not “kill” LIBOR – that came from a combination of alleged manipulation during the financial crisis and a move away from the interbank lending that underpins the rate – the official sector did facilitate its replacement. Meanwhile, the rise of ESG largely came from investors wishing to invest in companies with a focus on environmental, social and governance issues. (To be fair, the ESG issue is taking on a regulatory tinge with the SEC’s frenetic rulemaking progress.)
Finally, sometimes third party legislation can create policy change in the loan market. The Kirschner litigation ultimately will determine whether term loan Bs are securities. If they are determined to be securities, this will have ramifications on access to syndicate information, it will require all syndication, distribution and trading activity to go through broker-dealers, it may replace the syndication process with a 144a offering and it may subject trading to reporting, margin, net capital, trade clearance and other rules that pertain to bonds.
Thus, there are many ways that policy changes trickle into the loan market – and not all of them are through Washington.
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The LSTA would like to thank the speakers – and more than one-thousand attendees – at the LSTA Summer Series. All the replays (and slide decks) are available here. We look forward to seeing you in our autumn 2022 conference series.
