Napier Park European Credit Opportunities Fund Ltd v (1) Harbourmaster Pro-Rata CLO 2 B.v (First Respondent) (2) Deutsche Bank AG, London Branch (Second Respondent) (3) Blackstone/GSO Debt Funds Europe Ltd (Formerly Known as Harbourmaster Capital Ltd) (Third Respondent) (4) Deutsche Trustee Company Ltd (Fourth Respondent)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lord Justice Floyd,Lord Justice Longmore |
| Judgment Date | 11 July 2014 |
| Neutral Citation | [2014] EWCA Civ 984 |
| Docket Number | Case No: A3/2014/1381 |
| Court | Court of Appeal (Civil Division) |
| Date | 11 July 2014 |
[2014] EWCA Civ 984
Lord Justice Longmore
Lord Justice Lewison
and
Lord Justice Floyd
Case No: A3/2014/1381
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT, CHANCERY DIVISION
THE CHANCELLOR OF THE HIGH COURT
HC14B00525
Royal Courts of Justice
Strand, London, WC2A 2LL
Robert Miles QC and Gregory Denton-Cox (instructed by Bingham McCutchen (London) LLP) for the Appellant
Richard Snowden QC and David Allison QC (instructed by Allen & Overy LLP) for the Fourth Respondent
Hearing date: 9 July 2014
Introduction
On 23 August 2006 Harbourmaster Pro-Rata CLO 2 B.V. ("the Issuer") raised €602 million through the issues of 14 classes of notes ("the Notes"). The Notes are secured on the proceeds of an underlying portfolio of loans originally owned by the Issuer under what is known as a collateralised loan obligation ("CLO") structure. The different classes of Notes had different priorities for redemption, and each class carried a different rate of interest. The dispute arises between the Senior Noteholders, who hold Class A1 Notes ("the Senior Notes"), and the Junior Noteholders, who hold Class C Notes. The question is whether a substantial sum of money representing Unscheduled Principal Proceeds ("UPP") is available to be reinvested or should be paid out to noteholders. The UPP are only available to be reinvested if they meet "Reinvestment Criteria" specified in the documentation. Whether they do turns on the question whether the provision that "the ratings of the Class A1 Notes have not been downgraded below their Initial Ratings" is unsatisfied because the Senior Notes were downgraded on 5 February 2010 by Standard & Poor's Rating Group ("S&P") from their Initial Rating of AAA to a rating of AA, even though they were then upgraded back to an AAA rating by S&P on 30 November 2012.
The Junior Noteholders contend that the UPP are available for reinvestment. The Senior Noteholders contend to the contrary. The Chancellor of the High Court decided the question in favour of the Senior Noteholders. Napier Park, one of the Junior Noteholders, represented by Mr Robert Miles QC and Mr Gregory Denton- Cox, now appeals. When I read the papers in preparation for the hearing I provisionally took the view that the Chancellor was correct. However, Mr Miles' excellent oral advocacy has persuaded me that he was wrong. Accordingly, for the reasons that follow I would allow the appeal.
The documents
The overall terms of the transaction are contained in a suite of interlocking documents entered into on 23 August 2006. It is common ground that these documents must be read in conjunction with each other. The three main documents were a Trust Deed constituting the Notes, a Collateral Management Agreement between the Issuer, the Collateral Manager and the Trustee ("the CMA") and a Collateral Administration Agreement between, amongst others, the Issuer, the Collateral Administrator, the Collateral Manager and the Trustee ("the CAA").
The Chancellor described the overall form of the transaction in terms which for the most part I gratefully adopt. The 14 classes of Notes issued on 23 August 2006 are divided into two sets of Senior Notes, seven sets of mezzanine Notes and 5 sets of subordinated junior Notes ("the Junior Notes"). They have a maturity date of 2022 but the offering circular makes clear that it is anticipated that they will be repaid or redeemed before then. Under the waterfall provisions of the CLO each of the classes of Notes is subordinated to the payments of principal and interest on the class of Note above them in the structure. At the time of their issue the Senior Notes were rated AAA by Fitch Ratings Ltd and Standard & Poor's ("S&P"). That rating was a condition of the issue and sale of the Notes. This was their "Initial Rating" as defined in the CLO documentation.
The sums raised by the issue of the Notes together with sums advanced by one class of Senior Noteholders were applied (after payment of fees and expenses) in the purchase of a portfolio of loans and participations in loans ("the Portfolio") described in the CLO documentation as "Collateral Obligations". These were defined as follows:
""Collateral Obligation" (a) any Loan which satisfies the Eligibility Criteria or, as the case may be, the Reinvestment Criteria at the time of acquisition; and (b) any sub-participation in Underlying Loans from time to time entered into with Qualifying Institutions pursuant to the terms of a Direct Sub-Participation Agreement, which satisfies the Eligibility Criteria or, as the case may be, the Reinvestment Criteria at the time of acquisition."
Proceeds arise under the Portfolio from three principal sources: payment of interest on the Collateral Obligations, sale of the Collateral Obligations, and repayment of the Collateral Obligations by the borrower. Interest is not available for reinvestment but is used on the next Payment Date after receipt to pay certain items in the Priorities of Payment waterfall. If Collateral Obligations are sold, the proceeds of sale are treated as principal. The monies generated by such sales are defined as Sales Proceeds and must be paid by the Collateral Administrator into the Principal Account. They are then used to redeem the Notes in accordance with the waterfall. If a borrower repays a Collateral Obligation, the repayments may either be Scheduled Principal Proceeds or UPP. They will be Scheduled Principal Proceeds if they are repaid in accordance with the terms of the underlying Collateral Obligation. They will be UPP if they are repaid early, that is to say before the maturity of the underlying Collateral Obligation. These proceeds are also "Principal Proceeds" as defined in the CLO documentation, but result from the action of the borrower, rather than the Collateral Manager.
The lifecycle of the CLO divides into several relevant periods. The Ramp-Up Period began on the Closing Date of the transaction (23 August 2006) and ended on the Effective Date (23 May 2007). During that period the Collateral Manager was required to use all commercially reasonable efforts to ensure that the proceeds of the issue of the Notes were applied in the acquisition of Collateral Obligations which satisfied the Eligibility Criteria and Reinvestment Criteria. The Notes cater for the possibility that at or after the Effective Date the Notes are downgraded from their initial ratings. The definition of "Effective Date Rating Event" provides, so far as material, as follows:
"Effective Date Rating Event means
(a) … (ii) the Initial Ratings of any of the Notes being downgraded or withdrawn, or (iii) any of the Ratings Agencies notifying the Collateral Manager … that such Ratings Agency intends to reduce or withdraw any of its Initial Ratings of the Notes, in the case of (ii) or (iii), upon request for confirmation of the Initial Ratings by the Collateral Manager… following the Effective Date; and
(b) either the failure of the Collateral Manager … to present to the Rating Agencies or the failure by any Rating Agency to accept a Rating Confirmation Plan setting out the actions the Collateral Manager … is intending to take in order to cause the Initial Ratings to be confirmed or reinstated…"
It is important to note that an Effective Date Rating Event will not occur unless both (a) and (b) are satisfied. The obligation on the part of the Collateral Manager to seek the confirmation referred to in that definition arises under clause 10.4 of the CMA. However, that clause (and condition 7 (d) of the Notes itself) also makes clear that the Collateral Manager has no obligation to present a Rating Confirmation Plan. The consequence of an Effective Date Rating Event is dealt with by condition 7 (d) of the Notes which provides, so far as material:
"In the event that, as at the second Business Day prior to the Payment Date following the Effective Date … an Effective Date Rating Event has occurred and is continuing, the Notes shall be redeemed in accordance with [the waterfall] until redeemed in full or, if earlier, until the Rating Agencies confirm the Initial Ratings of the Notes."
The next relevant period of the CLO lifecyle was the Reinvestment Period. That began on the Closing Date (23 August 2006) and ended on 15 October 2013.
The third relevant period began on 15 October 2013 and will end on 15 October 2015.
Clause 11 of the CMA provides for the sale and, in certain circumstances, reinvestment by the Collateral Manager of certain types of Collateral Obligation. Clause 11.1 deals with the sale of "Credit Impaired Collateral Obligations"; clause 11.2 with the sale of "Defaulted Collateral Obligations"; clause 11.3 with the sale of "Appreciated Collateral Obligations"; and clause 11.4 with the discretionary sale of Collateral Obligations. The basic principle is that sale proceeds from such sales are to be reinvested during the Reinvestment Period. But in each case a pre-condition of reinvestment is that "no Event of Default [has] occurred which is continuing". "Events of Default" are matters such as non-payment of interest or principal and the occurrence of certain insolvency events. Clause 11.6 provides that during the Reinvestment Period the Collateral Manager shall...
To continue reading
Request your trial
-
Palladian Partners LP v The Republic of Argentina
...but where the meaning of the provision is nonetheless open to question. 138 As Lewison LJ put it in Napier Park Europe v Harbourmaster [2014] EWCA Civ 984 at [26], on appeal from a decision of the then Chancellor: “Once an alternative reading emerges as a possible meaning, the interpreter ......
-
Fomento De Construcciones Y Contratas S.A. v Black Diamond Offshore Ltd and Ors
...relevant principles were not in dispute before us. They have been set out many times, including in Napier Park European Credit Opportunities Fund Ltd v Harbour Master Pro-Rata Clo 2 BV [2014] EWCA Civ 984 [31] – [37]; Wood v Sureterm Direct Ltd [2015] EWCA 839 [28] – [31]; Videocon Global L......
-
Rail for London Ltd v The Mayor & Burgesses of the London Borough of Hackney
...PLC v Veloso [2012] EWHC 2856 (Comm), Napier Park European Credit Opportunities Fund Limited v Harbourmaster Pro-Rata Clo 2 B.V. [2014] EWCA Civ 984, Mitchell v Watkinson [2014] EWCA Civ 1472, Blindley Heath Investments v Bass [2015] EWCA Civ 1023, Mears v Shoreline Housing Partnership ......
-
Richmond Pharmacology Ltd v Chester Overseas Ltd and Others
...(Jersey) Limited [2014] EWCA Civ 603 and Napier Park European Credit Opportunities Fund Ltd v Harbourmaster Pro-Rata Clo 2 B.V. [2014] EWCA Civ 984. 44 Before closing submissions, I supplied counsel with a summary of what I regard as the applicable principles and they both agreed that the s......
-
Contractual interpretation disputes from the Trustee's perspective: The saga continues
...Bank ("Rainy Sky") ([2011] 1 WLR 2900), Napier Park European Credit Opportunities Fund Limited v Harbourmaster Pro-Rata CLO 2 BV ([2014] EWCA Civ 984), Arnold v Britton ([2015] 2 WLR 1593) and Marks and Spencer PLC v BNP Paribas Securities Services Trust Co (Jersey) Ltd ("M&S v BNP") ([2015......
-
'Ready To Pull The (Downgrade) Trigger Again?' Court Of Appeal Reverses Napier Decision
...CLO 2 BV [2014] EWHC 1083 (Ch), High Court: 2 Napier Park European Credit Opportunities Fund Ltd v Harbourmaster Pro - Rata CLO 2 BV [2014] EWCA Civ 984, Court of Appeal 3 [2009] UKSC 2 4 Because the investment criteria that applied at the end of the ramp-up period were drafted differently.......
-
Beyond the Real and the Paper Deal: The Quest for Contextual Coherence in Contractual Interpretation
...2.37 See discussion at 633-644.38 See, for example, Napier Park European Credit Opportunities Fund Ltd vHarbourmaster Pro-RataClo 2 BV [2014] EWCA Civ 984; Morris vBlackpool Borough Council [2014] EWCA Civ 1384;628 C2016 The Author. The Modern Law Review C2016 The Modern Law Review Limite......