July 22, 2019 - As reported in the Wall Street Journal, last week Senator (and presidential candidate) Elizabeth Warren introduced a bill, the “Stop Wall Street Looting Act of 2019”, that primarily targets private equity firms in a number of significant ways.  More importantly for the loan market, buried in the bill are two sections that, were the bill to become law, could have serious negative consequences for leveraged loans and CLOs, including the dilution of the rights of secured creditors and the re-imposition of risk retention for CLO managers.  While very concerning in theory, as we learned in School House Rock the chances of the bill becoming law given the current political split in Congress are virtually nil.  Nevertheless, a deeper dive into the bill and its implications is warranted as is the need to be mindful that the leveraged loan and CLO markets continue to be targeted by the press and many lawmakers.

What is in the bill?
The bill is, first and foremost, a shot across the bow of 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 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, unilaterally 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.

What is likely to happen now?
In a word, nothing.  The Senate is under the control of a Republican majority so the fact that the bill was introduced by Senator Warren and some of her Democrat colleagues means it will not be taken up or considered in this Congress.  Indeed, it appears that the bill is meant by Senator Warren to stake out a presidential policy position rather than as a viable piece of legislation.

What lessons can be learned from the introduction of this bill?
The leveraged loan market finances the growth of American companies and the millions of jobs that come with it.  Nevertheless, today, there is a presumption among many in the press and some legislators that the leveraged loan market, specifically CLOs, will cause the next financial crisis.  We should learn our lessons of the past and not rush to impose sweeping financial regulations based on a perceived belief that is not supported by the facts.  In fact, as federal regulators have repeatedly said, 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 a costly mistakes.