Investors Suing JPMorgan May Redefine the Leveraged Loan 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 markedly 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.

The suit stems from a $1.8 billion loan that JPMorgan and others arranged for Millennium Health LLC -- then owned by private-equity firm TA Associates -- and sold to investors in 2014. Within a matter of months, lenders saw the value of their loan plunge as the company disclosed that federal authorities were investigating their billing practices. Millennium agreed to pay $256 million to resolve the probe, and would go on to file for bankruptcy.

JPMorgan knew U.S. officials were investigating Millennium when it sold the loan, but didn't tell investors who were about to buy the debt, Bloomberg reported in 2015. The bankers did not provide the information because Millennium told them it wasn't material at the time.