In an eagerly awaited decision, the Second Circuit has resolved the debate on whether a syndicated term loan qualifies as a “security”, decisively announcing “no”. On August 24, the Court of Appeals for the Second Circuit established its ruling, upholding the lower court’s holding in Kirschner that leveraged loans are not securities. The Securities and Exchange Commission (SEC) chose not to submit a brief, leading the court to determine, in its application of the Reves test, that three of the four Reves conditions were fulfilled.
The aforementioned decision arrived after the SEC, despite being invited to, declined to weigh in on the argument of categorical characterization of leveraged loans. In doing so, it was ultimately left to the Second Circuit to offer a legal stipulation regarding the status of these loans.
In the context of the Reves test, the court analyses a series of factors in determining the categorization of a certain note as a security, including factors such as: public distribution, feasibility of the issuer, the reasonable expectation of the investing public, and the existence of an alternative regulatory regime. In the Kirschner case, three out of these four factors weighed in favor of ruling that leveraged loans are not securities.
Professionals in law firms and corporations dealing with securities should view this ruling as a definitive stance on the legal categorization of leveraged loans. It highlights the nuanced court proceedings that allowed the judges to make a distinction between these loans and conventional securities. Such distinctions will shape the legal landscape and have practical implications on the manner in which such loans are administered and governed moving forward.