Loan Market Breathes a Sigh of Relief As SDNY District Court Finds Loan Are NOT Securities

 

On May 22, 2020, the loan market let out a collective sigh of relief as Judge Gardephe dismissed the Millennium Lender Claim Trust’s complaint alleging securities law violations related to the sale of loans. The central question considered was whether loan trading should be subject to securities laws. The loan market operates on the assumption that loans are not securities, and the LSTA and Bank Policy Institute sought authority for leave to file briefs as amicus curiae to support that position. The motion for leave to file was denied, thus heightening concern over the outcome. But the concerns turned out to be unwarranted. Rather than redefining the leveraged loan market, Judge Gardephe stuck with the status quo finding that the loans were not securities after applying the four prong Reves test, which considers: (i) the motivations of Seller and Buyer; (ii) the distribution plan for the loans; (iii) the reasonable expectations of the investing public and (iv) the existence of another regulatory scheme. The Court pointed to the fact that the documents used the terms “loan documents,” “loan,” and “lender” consistently throughout, instead of “investor” which “would lead a reasonable investor to believe that the Notes constitute loans, and not securities.” The Court also noted in light of the Banco Español case, where the Second Circuit affirmed the district court’s finding that because “the Office of the Comptroller of the Currency has issued specific policy guidelines addressing the sale of loan participations,” application of securities laws is unnecessary as another regulatory scheme exists. (Order at 21, citing Banco Español de Credito v. Sec. Pac. Nat. Bank, 973 F.2d 51 (2d Cir. 1992)). The Plaintiff has until June 5, 2020 to amend the complaint.

Supreme Court Rules the Federal Government Must Pay Health Insurers’ Multi-Billion Dollar Risk Corridor Claims

 

Insurance markets have been watching the Supreme Court’s docket for its ruling on whether the Federal Government must compensate some of health insurers’ losses. Today the Supreme Court ruled that the Federal Government must satisfy these obligations. Insurers and holders of their claims are expected to seek billions of dollars of compensation.

Section 1342 of the Patient Protection and Affordable Care Act attempted to mitigate risk for insurers who sold health insurance on federal insurance exchanges through a “risk corridor payment system” – during the first three years of the insurance exchanges’ operation, 2014 through 2016, insurers who profited from selling insurance on the exchanges transferred a share of their profits to the Federal Government, which was required to compensate other insurers whose costs exceeded the premiums they collected on the exchanges. However, in 2014 the Congress passed an appropriations bill that purported to limit these compensation payments, and a federal appeals court ruled that this and subsequent appropriation bills repealed or suspended the Federal Government’s obligation to make transfer payments to loss-making insurers. Some insurers’ losses reached billions of dollars.

Today the Supreme Court held that § 1342 imposed a direct legal obligation on the Federal Government to make risk corridor payments to loss-making insurers who had participated in the insurance exchanges, notwithstanding the Federal Government’s argument that § 1342 provided insufficient details for how the Federal Government should satisfy these obligations. The Court held that § 1342 does not require risk corridor payments to be budget-neutral, nor to permit partial satisfaction of the Federal Government’s obligations to insurers, and rejected arguments that an appropriations bill could implicitly repeal another statute’s express statutory language.

Investors who are interested in trading in insurers’ risk corridor claims should note that while the Supreme Court’s ruling appears to shelter risk corridor payments from any offsets or deductions by the Federal Government, there are further nuances they should understand concerning how the risk corridor payment program calculates claim amounts – and in how claim transfer agreements structure transferees’ rights.

Investors who want to capitalize on these developments should contact Raniero D’Aversa and Allison Citron of Orrick’s Restructuring group.

COVID-19-Related Defaults in European Leveraged Loans Could Create Opportunities for Distressed Investors

 

Since the last financial crisis, borrowers and private equity sponsors have cut distressed investors out of most European leveraged loan deals. According to Reorg Debt Explained about 66% of European leveraged loans in 2019 restricted transfers to distressed investors.[1] But the recent economic turmoil created by the COVID-19 pandemic could create opportunities for distressed investors to return to the market. Fitch Ratings recently forecast a 4% default rate for European leveraged loans in 2020 and a 7% default rate in 2020.[2] In a severe downside scenario, Fitch projected that default rates could reach as high as 14% next year. In some European leveraged loan deals, the transfer restrictions that have kept distressed investors out of lending syndicates may fall away if events of default (or certain specific events of default) occur and continue. Read our key takeaways here.

CARES Act Update: Small Business Administration Releases Paycheck Protection Program Regulations

 

On April 2, 2020, six days after the CARES Act was enacted, the Small Business Administration (“SBA”) released an interim final rule (the “Interim Final Rule”) implementing the Paycheck Protection Program (“PPP”). For an overview of the PPP sections of the CARES Act, see our previous alert, which is available here.

Read our discussion of the key provisions of the Interim Final Rule, along with a brief discussion of the revised Borrower Application Form and related guidance from the Treasury Department and the SBA, here. Significantly, the Interim Final Rule states that the SBA also intends to promptly issue additional guidance regarding the applicability of its affiliation rules to PPP loans.[1]

Secondary Trading As Usual?

 

In a very short time, the COVID-19 pandemic has spread frightening levels of uncertainty all around the world. While many schools, businesses, and houses of worship have closed, the financial markets remain open. Like other markets, the secondary market for syndicated loans has experienced stomach-churning volatility and steep declines in asset prices in recent weeks. If you aren’t thinking about how COVID-19 could affect liquidity and settlements, you should be. Fortunately, the standard trading documents published by the Loan Syndications & Trading Association (the “LSTA”) already contain important concepts and tools aimed at promoting liquidity and pushing trades toward settlement, even during times as uncertain as these.

Click here for a brief refresher on some of the provisions that could prove critical in the months ahead.

The Coronavirus Aid, Relief and Economic Security (CARES) Act Becomes Law – With Major Enhancements

 

By voice vote on March 27, the House of Representatives passed the Coronavirus Aid, Relief and Economic Security Act (the “Act”), a version of which the Senate passed on a 96-0 vote two days earlier. President Trump promptly signed the Act into law. The Act includes significant amendments to the Senate bill resulting from legislative negotiations that took place since we last analyzed it here. The final version of the Act increases funding for loans to small and large businesses, increases oversight on the Department of the Treasury’s loans and grants to businesses, and adds funding for struggling state, tribal and local governments, individuals and healthcare providers. We summarize key changes here.

Congress Has Passed Phase III of the Federal Coronavirus Relief Legislation: Here’s What You Need to Know about the Legislation’s COVID-19-related Small Business Administration Loan Resources

 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act – the third phase of Congress’s response to COVID-19, which was enacted on March 27, 2020 – includes a Paycheck Protection Program. The proposed program would, among other things, expand the scope of the Small Business Administration’s available 7(a) loans during a “covered period” beginning on February 15, 2020 and ending on June 30, 2020. (The Small Business Administration (SBA) provides 7(a) loan guarantees for certain loans made by participating lending institutions to qualifying small businesses.) Certain key elements of the Paycheck Protection Program are described here, followed by a discussion of various other SBA loan resources. The final version of the bill reflects substantial changes from the version introduced into the Senate on March 19, 2020.

CARES Act Inches Closer, but Terms for Economic Relief Still Uncertain

 

When we last wrote, we advised that the CARES Act’s provisions granting extraordinary power to the Secretary of the Treasury to determine those businesses’ eligible for financial relief without legislative oversight was likely to be a significant point of contention during legislative negotiations over approval of the Senate Bill. Our prediction proved correct, with passage of the Bill being delayed for several days through procedural measures. Recent reports have indicated that Secretary Mnuchin has agreed to strict legislative oversight over his authority to designate eligible businesses entitled to receive funding, which has increased in the aggregate from $150 billion to $500 billion in aid for corporations and municipalities. The agreement purportedly also includes hundreds of billions of dollars in funding for hospitals – a significant increase from the Bill’s initial allocation. Read our key takeaways here.

What You Need to Know About Proposed and Existing COVID-19-related Small Business Administration Loan Resources

 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act – which was introduced into the Senate on March 19, 2020, as the third phase of Congress’s response to COVID-19 – includes a Small Business Interruption Loan program. The proposed program would, among other things, expand the scope of the Small Business Administration’s available 7(a) loan guarantees during a “covered period” beginning on March 1, 2020 and ending on December 31, 2020. (The Small Business Administration (SBA) provides 7(a) loan guarantees for certain loans made by participating lending institutions to qualifying small businesses.) Read our key takeaways here.

What You Need to Know About the Proposed Senate Coronavirus Aid, Relief and Economic Security (CARES) Act

 

The goal of the trillion-dollar Coronavirus Aid, Relief and Economic Security Act (CARES Act) introduced yesterday in the Senate is the quick distribution of cash to individuals, small businesses and critical economic sectors such as the airline industry, providing financial assistance to students, expediting coronavirus testing and easing shortages of medical supplies and personnel. While the bill as drafted has met with resistance from Democratic leaders, we expect a version of this bill to be enacted soon. The CARES Act is 247 pages long and seeks to address many critical problems. We summarize below some key provisions here.