Napier Park European Credit Opportunities Fund Ltd v Harbourmaster Pro-Rata Clo 2 B.V. & Ors

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