July 11, 2014
COURT OF APPEAL (CRIMINAL DIVISION)
United Kingdom
CORAM
AI Generated Summary
Harbourmaster Pro-Rata CLO 2 B.V. issued €602 million in notes under a CLO backed by a loan portfolio. A dispute arose between Class A1 Senior Noteholders and Class C Junior Noteholders over whether Unscheduled Principal Proceeds (UPP) received after October 2013 may be reinvested under clause 11.5 or must be paid to redeem notes. The Reinvestment Criteria include criterion 4(i) requiring that Class A1 ratings have not been downgraded below their Initial Ratings. S&P downgraded the Senior Notes from AAA to AA in 2010 but upgraded them back to AAA in 2012. The High Court (the Chancellor) held the historic downgrade permanently barred reinvestment and ordered UPP applied to redemption. On appeal by Napier Park, Lewison LJ applied an iterative, business common sense approach, concluding that a past downgrade followed by upgrade should not bar reinvestment when the current rating is AAA. The Court of Appeal allowed the appeal, with Floyd LJ and Longmore LJ agreeing.
Judgment
Lord Justice Lewison:
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 Chanc