Are You Up To Speed on Middle Market Regulatory Issues? | Practical Law

Are You Up To Speed on Middle Market Regulatory Issues? | Practical Law

A discussion of regulatory issues affecting the middle market.

Are You Up To Speed on Middle Market Regulatory Issues?

Practical Law Legal Update 4-543-3826 (Approx. 4 pages)

Are You Up To Speed on Middle Market Regulatory Issues?

by Practical Law Finance
Published on 03 Oct 2013 • USA (National/Federal)
A discussion of regulatory issues affecting the middle market.
Middle market loans are an important component of the corporate loan market. The middle market can be defined in different ways, including by either the size of the borrower (annual revenues of less than $500 million or annual EBITDA of less than $100 million) or the size of the loan (less than $500 million). For more information generally on the middle market, see Practice Note, Middle Market Lending: Overview.
Focus on the middle market has increased in recent years as a result of the growing pool of investors interested in middle market loans. One of the key concerns for loan market participants is the impact of regulation on the loan market. While there has been a lot of focus on these issues in the large cap market, middle market borrowers and lenders are also concerned about how key regulatory issues may affect their market. These issues include:
  • The leveraged lending guidance. The final Intra-agency Guidance on Leveraged Lending (which updated the 2001 Leveraged Lending Guidance) was released by the federal bank regulatory agencies on March 21, 2013. Commentators have expressed several concerns about the guidance and the dampening effect it may have on banks' ability to make middle market leveraged loans. Issues include:
    • the definition of leveraged finance (for example, the treatment of fallen angels and asset-based loans);
    • the increase in criticized assets; and
    • implementation of banks' policies, procedures and systems.
  • The Federal Deposit Insurance Corporation (FDIC) assessments. The changes to the FDIC insurance assessments have increased the costs to banks of doing business in leveraged lending.
  • The new deemed exchange tax rules. These tax rules, which went into effect on November 13, 2012, increase the risk that borrowers will recognize cancellation of debt income (CODI) in connection with an amendment or modification of their middle market loans.
  • The Foreign Account Tax Compliance Act (FATCA). FATCA begins to take effect in 2014 and is intended to combat offshore tax evasion. It will have a significant impact on foreign banks, offshore funds and CLOs. Since foreign banks are not major players in the middle market, FATCA should not impact the middle market as much as the large cap loan market. However, the final FATCA regulations as currently drafted impose potentially fatal requirements on vintage CLOs.
  • Reform of Chapter 11. Middle market participants should pay close attention to any discussions surrounding Chapter 11 reforms.
For a detailed discussion of these and other regulatory issues, see our recent article from Tess C. Virmani, Assistant General Counsel at the Loan Syndications and Trading Association, Article, Regulatory Issues Affecting the Middle Market.