Perhaps it’s not actually a full-on bacchanalia in the loan market. To be sure, we are 10 years into a recovery, Fitch’s loan default rate sits at just 1.5% (and is expected to just inch up through 2020) and lenders are likely to accept lower spreads and looser terms. However, even in this environment, recent research from Covenant Review and LCD suggests a market that does demonstrate rational behavior.
A number of global regulators have been warning institutions that i) LIBOR is ceasing, ii) transition plans are critical and iii) it’s (past) time to move on to a new rate. Last Friday the SEC added its voice in a joint eight-page Staff Statement on LIBOR Transition. This is not simply theoretical.
In the past year, one might have noticed a certain alarmist tone in the press’s coverage of leveraged lending. Commentators have pointed to potential overheating, overleveraging (or, at least, overgrowth) of the loan market. We’ll acknowledge that leverage is higher and documents are looser. But we’d also gently recommend that commentators consider i) a data-based analysis of 2019 versus 2018 and ii) an apples-to-apples comparison to bonds. The real story is – as it often is – a bit more nuanced.
Many market participants have been closely following the LSTA’s risk retention lawsuit against the SEC and the Fed and many rumors have come to our attention concerning the status of the case. Specifically, we have been hearing that the decision would come out this week (it did not) and that we will prevail (we may or we may not). The following brief summary is meant to describe where we are now and explain what is actually likely to happen in the coming days or weeks.
Friday morning, LSTA EVP Meredith Coffey presents at Allied Irish Bank, discussing where we were in 2017, where we are today, and what may be on tap for the next 11 months.
Leveraged Loans: Market and Regulatory Trends
On Friday, May 26, 2017, LSTA EVP Meredith Coffey and general counsel Elliot Ganz met with Craig Phillips, Counselor to Secretary of the Treasury Steven Mnuchin to discuss a number of regulatory issues impacting the loan market. The meeting was connected to an Executive Order on Core Principles for Regulating the United States Financial System (the “EO”) issued by president Trump early in February that enumerates “core principles” by which the administration will be guided in regulating the U.S. financial system. Most relevant to the loan market is a provision to “make regulation efficient, effective, and appropriately tailored.”
Testimony of LSTA EVP Meredith Coffey on the Volcker Rule and Risk Retention before the House Financial Services Subcommittee on Capital Markets.
Become a Member
Membership in the LSTA offers numerous benefits and opportunities. Chief among them is the opportunity to participate in the decision making process that ultimately establishes loan market standards, develops market practices, and influences the market’s direction.