Middle-Market Public Policy Roundup

Registration remains open for ACG’s Middle Market Fly-In on June 19—don’t miss your opportunity to engage with lawmakers on Capitol Hill.

In other news from Washington, D.C., last Monday, the Federal Reserve released its second “Financial Stability Report,” which highlighted leveraged lending as a growing concern. Similarly, Sen. Sherrod Brown sent a letter to regulators, in advance of their regular congressional testimony, requesting that they prepare to discuss how they are addressing the increase in leveraged lending. Finally, a bill that would direct the SEC to increase its focus on ways to facilitate the flow of capital to rural communities was passed out of the House Financial Services Committee.

ACG Middle Market Fly-In Registration Open

Despite the powerful impact of the middle market on the U.S. economy, it has been underrepresented in policy discussions. To strengthen the voice of the middle market on Capitol Hill, ACG will host its Middle Market Fly-In on June 19. This is an opportunity for ACG members from across the country to come together in Washington, D.C., to speak to their elected representatives about the important role of the middle market in creating jobs and boosting revenue, as well as the need for policies that promote middle-market growth.

Participants will have a chance to educate members of Congress and their staff about the middle market and to promote the Congressional Caucus for Middle Market Growth, a group of lawmakers committed to pro-growth policies. These efforts help ensure the middle market stays top of mind with policymakers.

No experience on Capitol Hill is necessary. Before embarking on Hill visits, all registered ACG members will participate in advocacy training that will cover everything they need to know for a successful afternoon of meetings.

There is no cost to attend the Fly-In, but registration is required. Register today!

Leveraged Lending Continues to Concern Policymakers

In its second Financial Stability Report, the Federal Reserve warned of the growing prevalence of leveraged loans in the corporate world.

The report, released May 6, estimates the total leveraged loan market, grew by 20 percent in 2018 to $1.1 trillion.  According to the report, the current peak is larger than those in 2007 and 2014.

“Business debt over the past seven years has been characterized by large increases in risky forms of debt extended to firms with poorer credit profiles or that already had elevated levels of debt,” the report’s authors wrote.

The report also highlighted a loosening of standards, such as fewer financial maintenance covenants on loan agreements, which have “effectively reduced the incentive to monitor obligors and the ability to influence their behavior.”

Citing the Moody’s Loan Covenant Quality Indicator, researchers working for the central bank said it now suggests that the overall strictness of loan covenants is near its weakest level since the index began recording it in 2012. Additionally, researchers said the fraction of leveraged loans with no financial maintenance covenants has risen substantially since the Financial Crisis.

While the Federal Reserve report is the most recent indicator of the focus placed on leveraged loans by regulators, ACG expects leveraged lending to continue to be an issue of growing interest to policymakers in the coming months.

Congress Conducting Oversight Hearings of Bank Regulators

This week, both chambers of Congress will conduct oversight hearings with the nation’s top financial regulators, including top officials from the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Federal Reserve and the Office of the Comptroller of the Currency.

In the Republican-led Senate Banking Committee, the hearing focused on the implementation of S.2155, the first large modification of the Dodd-Frank Act, which was passed last Congress, as well as leveraged lending and consumer protections generally.

On the leveraged lending front, Ranking Member Sherrod Brown, D-Ohio, who sent the financial regulators a letter in advance of the hearing raising concerns about leveraged lending, inquired about how we know the economy is safe given that the subprime crisis took regulators by surprise. Randal Quarles, Vice Chair for Supervision of the Federal Reserve, defended the stability of the financial system, stating that regulators are appropriately concerned about the correct response to the underwriting of leveraged loans that could have an impact in a downturn.

In the Democrat-controlled House Financial Services Committee, which will hold an oversight hearing of the same federal regulators on Thursday, we expect the hearing could be even more contentious.  House committee members are likely to weigh in with their own concerns related to leveraged lending as well as income inequality issues.

“Rural Job Creator” Bill Introduced

Last week, the House Financial Services Committee introduced the Expanding Access to Capital for Rural Job Creators Act.

If passed into law, the bill, introduced by Rep. Cindy Anne, D-Iowa, would add identifying unique challenges facing rural-area small businesses to the responsibilities of the SEC’s Small Business Capital Formation Advocate.

The issue of spreading capital access for startups and growing businesses “beyond the coasts,” exemplified by this legislation, has been one that is increasingly being discussed by policymakers in Washington.

The bill was passed out of the committee by a voice vote.