Class X litigation: Not so appealing

Following their loss at first instance in Titan Europe 2006-1 P.L.C. and others [2016] EWHC 969 (Ch) (the background to the case and our commentary can be found here), the Class X Noteholder appealed the decision in respect of the central issue in the proceedings –  when calculating the Class X Interest Rate in accordance with the Conditions, is it necessary to take account of any additional interest due under the Loans following a default? A victory for the Class X Noteholder would likely mean a substantial pay out to them over the four CMBS transactions. However, once again, the English Courts have ruled against them on the issue. In a split decision, the Court of Appeal in Credit Suisse Asset Management LLC v Titan Europe 2006-1 PLC & Ors [2016] EWCA Civ 1293 dismissed the appeal, stating (per Arden LJ) that:

In summary, I conclude that the “per annum interest rate” in the definition in the Ts & Cs of “Net Mortgage Rate” is the ordinary rate of interest payable on the underlying loans exclusive of any element of default interest. So default interest payable on the underlying loans is not to be taken into account in calculating the Class X Interest Rate. There was also commercial logic in excluding default interest.”

That conclusion was supported by Underhill LJ, who stated “I agree with Arden LJ that the phrase “per annum interest rate”, in the context in which it appears, most naturally reads as a reference to the ordinary interest rate applicable to the Loans and specified in the Offering Circular”.

In contrast, Briggs LJ reached the opposite conclusion on the construction of the relevant drafting and stated “I regard the natural meaning, in its context, of the critical phrase “the related per annum interest rate due on such Loan” as meaning the per annum rate which includes all the interest contractually due as at the relevant Payment Date under the relevant loan agreement, so that it includes what may loosely be called default interest whenever that is, or is part of, the interest rate due as at that date.  Although that outcome produces a result in the context of a serious default which bears harshly on noteholders lower in the waterfall than the Class X noteholders, that factor is insufficient to require the critical phrase to be given some restricted meaning contrary to its contextual meaning.”

Reed Smith represented the successful Issuers in each transaction. The full judgment can be found here

It is of course open to the Class X Noteholder to make an application for permission to appeal to the Supreme Court. Watch out 2017…

CMBS noteholder litigation: where do they stand?

The recent spate of litigation in CMBS transactions by noteholders to obtain interpretations of their rights directly in the English courts rather than through the note trustee raises two distinct questions: do investors have standing as a matter of both the transaction documents and general contract law to launch such proceedings and secondly should they be able to?

A typical limited recourse CMBS transaction will contain a general restriction on noteholders proceedings directly against the issuer to enforce their rights under the transaction documents (that right being reserved for the note trustee). On its face that should prohibit noteholders launching proceedings where the issuer is named as a defendant. However, depending on the wording of the clause on question, it could be argued that proceedings launched under Part 8 of the Civil Procedure Rules (“Part 8 Proceedings”) which are aimed at resolving matters of interpretation are not caught by such restrictions even if the issuer in such proceedings is technically listed as a defendant.

At law the situation is slightly different, in a global note structure an investor will hold their entitlement through the clearing systems (and related intermediaries) and while we refer to such investors as ‘noteholders’ in the colloquial sense (as such persons will be beneficially entitled to a proportion of the interest and principal paid by an issuer) they do not have a direct contractual relationship with the issuer. The actual ‘noteholder’, as a matter of contract law, is the holder of the global note and without direct rights being granted to the ultimate investors in the issuance (e.g. through additional deeds of covenant or drafting in the transaction documents), such investors will not arguably have the locus standi required to launch proceedings against as issuer (as they are not a party to the relevant contracts). In order to get around this restriction, the English courts would have to look through the global note structure and grant direct rights to the ultimate investors. The courts have been reluctant to do so and have adopted a ‘no look through’ principle (as recently affirmed, although not in a CMBS transaction, in Secure Capital SA v Credit Suisse AG [2015] EWHC 388 (Comm)) in relation to notes held in the clearing systems.

The second question is whether the ultimate investors should be able to launch Part 8 Proceedings in order to interpret certain provisions of the transaction documents. There is, of course, an advantage in achieving certainty of interpretation when it comes to ambiguous provisions of the documents and should a genuine ambiguity in interpretation arise, it is open for the relevant transaction parties to agree that it would be sensible for a noteholder to lead and indeed launch Part 8 Proceedings (rather than having a note trustee front their position). However, the obvious danger in allowing any and all ultimate investors to launch such proceedings without the consent of the other transaction parties is that multiple proceedings could be launched either simultaneously or consecutively significantly increasing the costs of the transaction and ultimately impacting junior noteholder recoveries. In addition, without the ability of the note trustee to ‘filter’ investor concerns and allegations, the process is open to abuse as investors could launch Part 8 Proceedings which do not purely deal with matters of interpretation but seek to obtain access to additional information and/or involve disputes of fact. In such circumstances, the issuance of Part 8 Proceedings would likely be disputed by the transaction parties but that in itself will come at a cost to the transaction. As in most cases, the drafting of in the individual clauses will be key. Better start reading those terms and conditions closely…

Happy Holidays all!

Italian NPL Market: the tightrope walker and the seagull!

During the summer I wrote about the marvels of the Italian tightrope trick (The NPL Circus: the Italian Tightrope) and remarked on the massive feat of the Italian legislature in making the seemingly impossible, possible with the establishment of a state guaranteed securitisation structure that is capable of divesting a significant volume of non-performing loans (NPLs) without “bailing in” creditors.

With the news that Prime Minister Matteo Renzi had failed to secure a victory for his “yes” campaign, there will now be a fresh challenge for the Italian NPL market.  It is as if a seagull has just dive bombed the Italian tightrope walker, the consequence being a stomach churning wobble or maybe a slip.  Although the arrival of this unwelcome guest is rightfully going to be treated by the tightrope walker with disdain, nevertheless the audience should not be surprised ‎as it may be that this is very much part of the trick.

The reality is that the beleaguered Italian banks continue to have astronomical volumes of NPLs that must be off-loaded in order to strengthen the banks and make them more resilient.  Nobody said that it would be easy and nor should it be given the complexity of the Italian banking system and the fact that Italian domestic retail investors are so heavily entwined with the banks.  By devising the guarantee securitisation structure, the Italian legislature has not only demonstrated that the deleveraging of the banks is a political “must” but that it is willing to implement the necessary legislation required to ensure that the Italian banks fulfil these political aims.

It is fair to say that the results of the Italian referendum and the subsequent resignation of Mr Renzi will no doubt be treated with trepidation given the obvious political uncertainty this creates.  However, one thing that does remain certain (and despite the fact that it is a magical time of the year) is that these huge volumes of NPLs are not going to miraculously disappear nor can they just be swept under the carpet.  In fact, when it comes to considering the deleveraging of the Italian banks, one cannot help but be reminded of the expression “too big to fail” that was so frequently used at the beginning of the global financial crisis when considering the status of banks.  The same can also be said of the Italian deleveraging process: it really is too big to fail (without exception) as the off-loading of NPL’s is integral for rehabilitating the banks and therefore the Italian economy as a whole.  It is for this reason indeed, that yesterday’s vote should merely be regarded as a wobble and very much part and parcel of the excitement and drama of the trick.

With-Hold on a second?! New ISE rule leads to automatic de-listing of debt securities at scheduled maturity

Picture this: it’s 1793. In England, George III is on the throne and the Bank of England issues the first ever ‘fiver’.  In the U.S.A, George Washington hosts the first US cabinet meeting as President and the capital moves from Philadelphia to Washington, D.C.  In France, the French Revolution is in full swing with King Louis XVI guillotined, and France becomes the first country to adopt the metric system.

And in Ireland, the Irish Stock Exchange is founded. Though of course, that is not to say that there weren’t other important things happening in Ireland at the time as well…. Continue Reading

The NPL Circus: the Italian Tightrope

This summer, fans of the non-performing loan (NPL) circus, are in for a treat with the launch of the Italian tightrope trick.

Spurred on by the recent European Banking Authority stress tests, the news last week that Banca Popolare di Bari will become the first bank to utilise the Italian state guarantee scheme and deploy securitisation technology as a means of off-loading a €470m portfolio of non-performing loans is a significant step forward for the global NPL market and therefore the NPL circus.

As we noted in April (Italian reform and the latent potential for CMBS), Italy is certainly the jurisdiction to watch in 2016 and in that vein, we are pleased to see that after months of waiting, the first Italian NPL securitisation will be deployed as a mechanism to address Italian bank NPL anguish. Although the application of this technology could be a huge boost for both the European NPL market and the utilisation of securitisation technology, the realities of whether this will become a commercial success will ultimately be contingent on the pricing of notes. Assuming, that these commercial objectives can be met (and there is every chance that they will be, given that the capital markets are currently awash with low yielding paper) then this is likely to be the first of many deals from the beleaguered Italian market and with it the NPL circus will have a new trick.

The establishment of this structure will be a massive feat for Italy, as somehow the Italian legislature has managed to conjure the impossible: on the one hand they have been prevented from applying state aid to address the NPL issue without “bailing in” creditors yet on the other hand the “bailing in” of creditors has not been a viable option given that these largely comprise Italian retail investors. In other words by devising a state guaranteed securitisation structure that is capable of divesting a significant volume of NPL’s, the Italians have somehow proven that it is metaphorically possible for someone to walk along a tightrope with their arms tied firmly behind their back and a parrot stood on their shoulder for good measure!

Although admittedly it has taken a while for the first transaction to reach fruition, the fact that Italy has proven that the seemingly impossible is possible, in a world where there is ever increasing focus on those banks that possess sizeable NPL exposures, then it is quite conceivable that from the doldrums of banking woes, Italy has managed to prove that there is a glimmer of hope for those banks and jurisdictions currently  struggling under the weight of their NPL’s.

As for the NPL circus, it is fantastic news that finally we can watch the long awaited Italian tightrope trick, however as the audience watch with bated breath, we cannot help but think, is this is a one trick wonder or a regular addition to the show!


Brexit – what can private equity funds do to hedge against sterling risk?

We have seen a dramatic increase in interest in hedging FX risk related to investments by private equity funds.

The precipitous decline in the value of sterling has caused complications for funds which are in the process of acquiring UK assets. For deals which are still going ahead, many sponsors are using or considering deal contingent FX hedges to protect them against further fluctuations. These products are offered by a small number of banks to funds which are buying or selling assets denominated in a different currency to their base currency.

They allow the fund to enter into an FX forward which will only settle if the sale goes ahead (for example, when the conditions precedent to completion such as competition clearance are satisfied). The forward agreement includes a schedule of settlement dates with FX rates which gradually move against the fund depending on when settlement actually occurs. They are, in a sense, options without a premium which are contingent on completion.

EU Referendum – what does it mean for alternative capital providers?

The UK referendum has caused uncertainty in the financial services industry, but what does it mean for alternative capital providers? And could it create some business opportunities?

Alternative capital providers are unregulated, or at least non-bank, financial institutions. Alternative finance embraces lenders from the smallest participants in peer-to-peer platforms to multibillion dollar global alternative lending funds. They cover product areas such as leveraged finance, real estate finance, factoring, leasing, consumer lending and trade finance.

The referendum has two key consequences for the alternative finance industry.

Read the full Client Alert here.


German Federal Court Ruling Important for Future Contractual Netting Arrangements

In a decision of 9 June 2016, the German Federal Court of Justice (Bundesgerichtshof, “BGH”) has ruled that the determination of the close-out amount in a netting provision based on the German Master Agreement for Financial Derivatives Transactions (Rahmenvertrag für Finanztermingeschäfte or DRV) is not legally effective in the event of insolvency to the extent that it deviates from section 104 of the German Insolvency Code.

The reasoning of the decision has now been published and provides a number of answers to questions which are important for future contractual netting arrangements.

To read more about the decision, please click here.

The Class X Factor: It’s a NO from the Chancellor

It’s not been a good month for Class X Noteholders. Following the judgment in the Windermere VII case (see our commentary here) in which Snowden J found against the Class X Noteholder, the Chancellor of the High Court, Etherton J, in Titan Europe 2006-1 P.L.C. and others [2016] EWHC 969 (Ch) similarly rejected the arguments put forward by the Class X Noteholders.

Continue Reading