Are Syndicated Term Loans Really Securities?

Today the US Court of Appeals for the Second Circuit will hear oral arguments in the case of Marc S. Kirschner v. JP Morgan Chase Bank, N.A., et al. The case will decide the issue of whether syndicated term loans are subject to state securities laws. The Second Circuit’s ruling has the potential to negatively impact the $1.4 trillion¹ syndicated term loan market in the US, greatly increasing the cost of capital for borrowers in this market.

The case stems from the bankruptcy of Millennium Laboratories LLC (“Millennium”), in which Kirschner, in his capacity as bankruptcy trustee, sued the banks that arranged a $1.775 billion term loan to Millennium. Kirschner alleged that the arranger banks violated “Blue Sky Laws,” the state equivalent of the federal securities laws, by making actionable misstatements and omissions to investors in the term loan. Counsel for the arranger banks countered that “a syndicated bank loan is not a ‘security’ and a loan syndication is not a ‘securities distribution’,” thus making securities laws inapplicable to the transaction.  

In May 2020, the US District Court for the Southern District of New York held that the term loans were not securities. The district court applied a four-part test established by the US Supreme Court in Reves v. Ernst & Young for determining whether notes are securities. Kirschner appealed the decision to the US Court of Appeals for the Second Circuit.

If syndicated term loans are held to be securities, the syndicated term loan market would be more akin to the high yield bond market, likely resulting in much higher transaction costs for borrowers.

We will continue to monitor the Kirschner case and provide an updated alert if merited.

¹ According to the LSTA, the par amount tracked by the Morningstar® LSTA® US Leveraged Loan Index, broadly used as a proxy for market size in the US, the institutional term loan market. The US market was about $1.4 trillion at the end of February 2023.