Investors suing JP Morgan could redefine the leveraged loan market

Yet there are growing warnings that the loan market is getting too risky with little oversight. The Federal Reserve this week addressed the dangers of leveraged loans in its semi-annual financial stability report, echoing the International Monetary Fund, the Bank of England and others. Robert Jackson Jr. of the Securities and Exchange Commission said last month that the regulator may need more power from Congress to control risks manifesting in the market.

Despite growing similarities between leveraged loans and junk bonds, the two markets retain notable distinctions.

Syndicated loans are only marketed to qualified, accredited investors to begin with. They are generally secured by a lien on the assets, which makes them less risky and less profitable than a comparable bond. They almost always pay a floating coupon and have more flexible prepayment options than bonds.

In particular, offering memoranda do not provide the same level of financial information as in bond prospectuses, and union participants have historically relied on confidential and non-public information in determining whether to lend.

The defendants claim that the investors knew this before the transaction.

“A lender who becomes a member of a union does so on the express condition that he is responsible for his own due diligence,” the industry groups wrote in the brief. “Declaring syndicated term loans as securities would upend the expectations of borrowers and lenders and wreak havoc in the large and vitally important market for these loans.”

The applicant must file his opposition to the motion to dismiss by May 31 at the latest.

Priscilla C. Carnegie