Excerpts: “Are Syndicated Term Loans Securities?”

  • The LSTA (joined by the Bank Policy Institute) argues vehemently that they are not and explains the materially negative consequences to borrowers and other stakeholders in the $1.2 trillion market for institutional term loans (and the $600MM+ CLO market) were a court to reach the opposite conclusion.
  • Loans are not securities. The LSTA’s brief notes that the U.S. Court of Appeals for the Second Circuit, in a 1992 case called Banco Espanol, held that a loan participation that was in relevant respects very similar to modern syndicated term loans was not a security.
  • In some respects, the growth and standardization of the syndicated term loan market in recent years and the settled expectations of market participants that have developed over that time—along with the SEC’s determination not to treat syndicated term loans as securities for disclosure and liability purposes—militate even more strongly against deeming such loans to be securities.
  • While syndicated term loans share some features with high-yield bonds, they have several key characteristics that are not found in bonds and that are incompatible with the regulatory scheme governing securities. To start, each member of a loan syndicate has its own direct contractual lending relationship with the borrower. Likewise, syndicated term loans are not marketed to the public. Rather, the participants in a loan syndicate are sophisticated institutions who are charged with conducting their own due diligence and agree by contract to do so. And, in contrast to investors in securities, participants in a syndicate may rely on confidential information—which sometimes includes material non-public information under the securities laws—in deciding whether to lend.
  • Borrowers may also prefer a syndicated term loan to issuing bonds precisely because loans are not subject to the restriction on trading securities based on material non-public information, and borrowers thus may disclose confidential information to syndicate members without making that information public to the world.
  • The SEC has implicitly recognized by declining to regulate syndicated term loans under the securities disclosure and fraud laws, that treating such loans as securities would not serve the main purpose of the securities laws, i.e., to protect investors who cannot conduct their own due diligence and thus must rely on public information.

Source: Loan Syndications & Trading Association