A group suing J.P. Morgan Chase and other Wall Street banks over a loan that went sour four years ago is alleging the underwriters engaged in securities fraud. If successful, the lawsuit could radically transform the $1.2 trillion leveraged lending market.
The defendants say there's one key problem — unlike bonds, loans aren't securities. As a result, they've filed a petition asking the court to dismiss the suit on those exact grounds.
The debate strikes at the heart of the leveraged loan market, which in recent years has come to look strikingly similar to the higher-profile one for junk-rated bonds. The standardization of loan terms, the deterioration of covenants and the growth of secondary trading continue to blur the lines between the two. Should the plaintiff ultimately prevail, it would dramatically alter how American companies raise debt, according to two industry groups that filed a brief supporting the defendants' argument last week.
"There are absolutely enormous market consequences if a court determines that leveraged loans are securities," said J. Paul Forrester, a partner at law firm Mayer Brown who's not involved in the litigation. "Leveraged loans and lenders would be potentially subject to the same offering and disclosure requirements as securities and would face the same regulatory oversight and enforcement consequences."