JPMorgan’s Leveraged-Loan Win Survives Supreme Court Appeal

Greg Stohr and Scott Carpenter
·3 min read

(Bloomberg) -- The US Supreme Court turned away an appeal that might have upended the $1.4 trillion leveraged loan market, leaving intact a legal victory for JPMorgan Chase & Co. and other banks.

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The justices, without explanation or any published dissent, refused to hear arguments from bankruptcy trustee Marc Kirschner in a clash over a $1.8 billion leveraged loan taken out by the drug-testing company Millennium Health LLC.

Kirschner had argued unsuccessfully that syndicated loans, a type of debt product sold to a group of lenders, are subject to regulation as securities. Leveraged loans, where banks and other financial institutions act as a middle-man to sell the debt to large groups of institutional asset managers, are a subset of syndicated loans.

The high court’s refusal to hear the case ends a lengthy legal saga that might have significantly affected the leveraged loan market, a key source of funding for junk-rated companies and private equity firms conducting buyouts.

By declining to examine the case, the Supreme Court left in place a 3-0 ruling by New York-based 2nd US Circuit Court of Appeals that effectively said these types of loans should be less regulated than similar asset classes such as high-yield bonds.

Read more: Private Equity’s Go-To Debt Market Gets Win With SEC Silence

First filed in 2017, the case briefly became the white hot center of attention for industry regulators and lobbyists after the 2nd Circuit made the surprise move in March of last year to request input from regulators, including the Securities and Exchange Commission.

Industry trade groups, fearing that the Gary Gensler-led SEC would opine that loans are securities, as it once had in a 1992 briefing in a case called Banco Espanol, intensively lobbied the SEC as well as its sister agencies. The industry’s most outspoken lobbying group, the LSTA, held over 10 meetings with SEC staff and three of its five commissioners, Bloomberg previously reported.

No SEC Opinion

After requesting several extensions of time, the SEC in July ultimately decided not to submit an opinion to the court — a shock move widely seen as making it extremely likely that the court would overturn the status quo. The 2nd Circuit’s decision that the loan at issue in the case was not a security came a month later.

The Supreme Court’s decision on Tuesday finally closes the book on the Kirschner saga.

“We are extremely gratified by this decision,” said Elliot Ganz, the LSTA’s head of advocacy, in a statement Tuesday morning celebrating the high court’s decision to pass on the case.

The LSTA has contemplated for decades the possibility that loans would be regulated as securities. When Ganz was interviewed by the LSTA for his current job about 19 years ago, one of the questions he was asked was what he would do if the threat arose that loans became securities, he said by email.

Despite the end of the case, there are some signs that syndicated loans could still become securities if US law changes in the future. The market continues to evolve to resemble high-yield bonds, and in October one SEC commissioner gave a speech saying that additional investor protections are needed in the fast-growing market, suggesting that loans might not always remain outside US securities laws.

The case centered on a 2014 deal led by JPMorgan. Millennium Health, the drug testing company that obtained the loan, ran into legal troubles soon after the loan began trading and filed for bankruptcy the next year.

Classifying leveraged loans as securities would force borrowers to submit additional disclosures and produce more financial data. It also would mean that subsequent trades would need to be settled far more quickly than they currently are.

The case is Kirschner v. JP Morgan Chase Bank, 23-670.

(Adds background on legal fight starting in fourth paragraph.)

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