Do the Securities Laws Matter? The Rise of the Leveraged Loan Market

Abstract

One of the enduring principles of federal securities regulation is the mantra that bonds are securities, while commercial loans are not. Yet the corporate bond and loan markets in the U.S. are rapidly converging, putting significant pressure on the disparity in their regulatory treatment. As securities, corporate bonds are subject to onerous public disclosure obligations and liability regimes, which corporate loans avoid entirely. This longstanding regulatory distinction between loans and bonds is based on the traditional conception of a commercial loan as a long-term relationship between the borrowing company and a single bank, in contrast to bonds, which may be issued to widely dispersed retail investors and are traded in a liquid market. Today, however, not only are loans funded by dispersed, non-bank creditors, but the pricing, terms, participants, and liquidity in the two markets are rapidly converging. Logically, securities regulators should respond to this functional convergence by treating loans and bonds as one and the same. While the regulatory disparity persists, however, it provides a rare natural experiment testing the effectiveness of the securities laws. That the loan market has achieved comparable depth and liquidity to the bond market, even in the absence of mandatory disclosure and robust antifraud provisions, suggests that the securities laws are not doing the work for which they were intended.