Yieldpoint Stable Value Fund, LP v Kimura Commodity Trade Finance Fund Ltd
| Jurisdiction | England & Wales |
| Judge | Stephen Houseman |
| Judgment Date | 22 May 2023 |
| Neutral Citation | [2023] EWHC 1212 (Comm) |
| Docket Number | Case No: CL-2022-000391 |
| Court | Queen's Bench Division (Commercial Court) |
[2023] EWHC 1212 (Comm)
Stephen Houseman KC
SITTING AS A JUDGE OF THE HIGH COURT
Case No: CL-2022-000391
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT (KBD)
SHORTER TRIALS SCHEME
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Fionn Pilbrow KC (instructed by Katten Muchin Rosenman UK LLP) for the Claimant
Nathan Searle & Robert Shoesmith of Hogan Lovells International LLP for the Defendant
Hearing date: 18 May 2023
Approved Judgment
I direct that no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Stephen Houseman KC SITTING AS A JUDGE OF THE HIGH COURT
This judgment was handed down remotely at 11:30am on 22 May 2023 by circulation to the parties or their representatives by e-mail and by release to the National Archives.
Stephen Houseman KC:
Introduction
Sub-participation is a well-known concept in corporate finance. It is used to reduce or eliminate the effect of default risk through back-to-back non-recourse funding. Risk and reward are shared in an agreed proportion through a ‘pay as paid’ model. Rather than taking a direct slice (and hence default risk) a participant sits outside the primary structure in a way that transfers economic impact without involving legal privity with a primary obligor. The prefix “sub” differentiates direct forms of stakeholding — including syndication, novation or assignment — although reference to “participation” is commonplace.
The issue in the present case concerns the nature or extent of a participation arrangement concluded between the Claimant (“Yieldpoint”) and the Defendant (“Kimura”) on 30 March 2021. I refer to this as the “MTV Participation”. It provided funding in relation to a pre-existing commodity finance facility described and defined below as the MTV Facility.
The sum at stake is relatively modest for the Rolls Building. Yieldpoint seeks repayment of US$5 million which it advanced to Kimura. Kimura says it has no obligation to repay this sum due to the non-recourse basis of the deal.
The parties disagree about the nature of their bargain or — more accurately — the extent to which it involved genuine proportionate participation by Yieldpoint. In summary:
(a) Yieldpoint contends that its capital was provided as a fixed-term loan of 12 months with a maturity date of 31 March 2022. As such, and in the absence of any notified extension by it, the principal sum became automatically repayable on 31 March 2022. The fact that Yieldpoint participated proportionately in the economic return and associated security enjoyed by Kimura under the MTV Facility did not alter this characterisation or preclude Kimura's independent repayment obligation upon maturity. Put simply, Yieldpoint did not stake its capital.
(b) Kimura contends that the transaction was (and, by definition, remains) a capital risk investment by Yieldpoint by way of pari passu participation as economic stakeholder or co-venturer in Kimura's share of the MTV Facility, i.e. a conventional proportionate sub-participation which also involved equitable assignments of primary receivables. Yieldpoint's capital was, by definition, exposed to underlying default risk, as occurred on or by 31 March 2022. The principal sum has not, therefore, become repayable and, so far as material, had not done so at the time of the subsequent insolvency of the underlying borrower in February 2023.
Sometimes there is insufficient documentation to explain the nature of a transaction. Here there is, if anything, too much. There is an awkward interplay between two separate agreements: a Master Participation Agreement for Trade Transactions dated 19 February 2021 (“MPA”); and the MTV Participation contained in or evidenced by formal Offer and Acceptance executed between the parties on 30 March 2021. Each side's analysis suffers heavy linguistic casualties. Making sense of what they objectively agreed is not easy. They at least agree that they made a binding contract as a matter of English law.
Indeed, it is common ground that the MTV Participation is or was a “ Participation Agreement” in respect of a “ Participated Transaction” as defined in and contemplated by the terms of the MPA. It involved sub-participation of some kind or to some extent, together with equitable assignments of relevant recourse rights.
The trial of this action took place on 18 May 2023. It was conducted under the Shorter Trials Scheme contained in section 2 of PD57AB pursuant to the Order of Mr Justice Foxton made on 9 December 2022.
Two factual witnesses were cross-examined: Nathaniel Polachek, Managing Member and Founding Partner of Yieldpoint; and Craig Manielle, Co-Head of Structuring at Kimura Capital LLP, investment adviser to Kimura. In the absence of any extra-contractual doctrines or material disputes about factual matrix, this evidence is of limited assistance. I am grateful to both witnesses for their testimony and insights.
For convenience, I will refer to the MPA, MTV Participation and MTV Facility as if still on foot, irrespective of the actual position in each case.
Relevant Background
MTV Facility
Kimura is a company incorporated under the laws of the Cayman Islands. Together with an entity in the Anglo American group (known as “AAML”) it has for some years provided substantial pre-export commodity finance to Minera Tres Valles SPA (“MTV”), a copper-mining and cathode-producing company incorporated and based in Chile.
As at the date of the MPA, Kimura and AAML were joint senior lenders to MTV under a US$45m four-year structured finance facility dated 10 December 2019 as amended and restated on 5 November 2020 (“MTV Facility”). Kimura and AAML provided US$22.5m apiece. This facility was fully funded at all material times.
Amongst other things, the MTV Facility provides for quarterly interest at a rate of 3-month LIBOR + 8.0% (plus default rate interest), monthly price participation in favour of the senior lenders and security over MTV's assets and operational output. Repayment of principal is structured in tranches, including a first tranche (8.33%) due from MTV on 31 March 2022. The facility is for a term expiring on 31 December 2024 subject to acceleration for default in the usual way. Citicorp is the facility and security agent.
MPA / Template Offer
The MPA was executed on 19 February 2021. This occurred in the context of Kimura and Yieldpoint entering into their first participation arrangement involving a US$3m 90-day inventory financing of sunflower seeds. Kimura proffered the MPA. It is based on or comprises the Bankers Association for Finance and Trade standard form at the relevant time which is available online (see www.baft.org).
The MPA defines Kimura as “ Seller” and Yieldpoint as “ Participant”. It contemplates future participations being offered by Kimura and potentially accepted by Yieldpoint in accordance with template “ Offer” and “ Acceptance” documents in Appendix I or “ such other form as [the parties] agree in writing” (clauses 3.1 & 4.1). This mechanism would then create a “ Participation Agreement” — or ‘PA’ for short.
The MPA has no set duration; it is terminable on 30 calendar days' written notice by either side (clause 21). It provides for English law and exclusive court jurisdiction (clause 25).
The MPA contemplates two broad categories of PA: unfunded and funded. It makes detailed provision for each kind, together with appended template forms of demand for payment under certain clauses in relation to each category of participation (Appendix II & Appendix III, respectively). The types of transactions in respect of which participation may occur — defined generically as a “ Transaction” and hence becoming a “ Participated Transaction” or ‘PT’ for short — are set out in clause 2. The MTV Facility is or was a loan for trade-related purposes within clause 2.1.12.
A fundamental feature of the MPA is the recourse and security regime, depending on whether a participation is funded or unfunded: clauses 5 to 9. A “ Funded Participation” corresponds with a conventional sub-participation. An “ Unfunded Participation” corresponds with what is conventionally known as a ‘risk participation’ in finance terminology.
Broadly speaking, the recourse and security regime contemplates that the Participant — after it has provided relevant funding — will become beneficially entitled by way of equitable assignment to the Seller's rights against its counterparty (e.g. a borrower such as MTV) under the relevant PT and may receive “ pass-through” payments from the Seller in each case reflecting the proportion of its participation — defined as the “ Participation Percentage”. The corollary of this figure is the “ Retention Share” defined as the percentage of the underlying “ Credit Amount” which is “ retained by the Seller at its own risk”.
Upon receipt of any “ Participation Payment” by the Seller, clauses 5.4 and 5.5 create an automatic transfer by equitable assignment to the Participant of “ an undivided 100% beneficial ownership interest in the Related Recourse Rights associated with the Participation Payment”. (These are defined as “ Transferred Rights”.) This is the only property ‘sold’ pursuant to a PA. The effect of such “ ownership transfer” is to place such beneficial interest “ beyond the reach of the Seller's creditors” in future (clause 5.6).
The Participant enjoys various ancillary protections which reflect its position as economic co-stakeholder or co-venturer in respect of the PT: clauses 12, 13 and 14. Broadly speaking, these clauses confer information and consultation rights with certain matters...
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