Jurisdiction - Singapore
Singapore – Napier Park European Credit Opportunities Fund Ltd V Harbourmaster Pro-Rata CLO 2 B.V. & Ors [2014] EWCA Civ 984.

20 November, 2014


Where a collateralised loan obligation structure provided for certain obligations to apply if “the ratings of the Class A1 Notes have not been downgraded below their Initial Ratings” and where the Class A1 Notes had been downgraded from AAA to AA in the past but had been upgraded again to AAA at the relevant point in time, held that the phrase “have not been downgraded” should be construed as meaning that the Class A1 Notes had been and remained downgraded at that relevant point in time.

This case concerned the interpretation of contracts in a collateralised loan obligation (“CLO”) structure. The CLO structure involved Harbourmaster Pro- Rata CLO 2 BV, as issuer, issuing 14 classes of notes, such notes being divided into senior notes, mezzanine notes, and subordinated junior notes. Under the waterfall provisions of the CLO, each class of notes are subordinated to the payments of principal and interest on the class of notes above them in the structure. The funds raised from the issue of such notes are in turn used to purchase a portfolio of loans and participations in loans (the “Portfolio”).

Under the terms of the notes, the collateral manager may apply unscheduled principal proceeds (repaid early by borrowers under the underlying loan obligations) received under the Portfolio to acquire more loan obligations during a stipulated time frame (the “Reinvestment Period”). Under the same terms, such reinvestment after the Reinvestment Period is only allowed if “the ratings of the [Senior Notes] have not been downgraded below their Initial Ratings”. If the above condition is not satisfied, the unscheduled principal proceeds would be used to redeem the Senior Notes instead of reinvesting such proceeds into the Portfolio.

The Senior Notes in the CLO structure had initially been rated as “AAA” but had been downgraded to “AA” for over two years and nine months after which time they were upgraded back to “AAA”. The collateral manager, having received over GBP 7m in unscheduled principal proceeds after the Senior Notes had been upgraded back to AAA, considered that there had been a downgrade and, therefore, the unscheduled principal proceeds had to be directed to redeem Senior Notes instead of being reinvested into the Portfolio. The Junior Noteholders disagreed.


The English Court of Appeal stated that, following the decision of the Supreme Court in Re Sigma Finance Corp, it should interpret tradable financial instruments such as the CLO using an iterative process. This involved weighing each interpretation and investigating its commercial consequences, and adopting the interpretation which was the most sensible.

The Court first considered whether the phrase “have not been downgraded” was ambiguous. While it noted that other parts of the relevant documents used the phrase “has occurred and is continuing” or other similar language, it did not think that too much weight should be placed on the tense used. It noted that even viewed simply as a matter of grammar the disputed phrase was capable in normal English usage of referring to something which was continuing or something which had continuing effect, and its grammatical construction often was used in that sense.

The Court then considered the overall structure of the transaction and observed that a historical downgrade of Notes was not, in various parts of the documentation, treated as an irreversible event that had continuing consequences. In addition, during the Reinvestment Period a downgrade of
the Notes had no contractual effect. That being the case, it was difficult to interpret that the same terms would provide a sea-change in the nature of the obligation to reinvest (i.e., a restriction against investment) at the end of the Reinvestment Period.


Furthermore, the obligation to reinvest related to unscheduled principal proceeds, that is, monies that arose from borrowers making early repayments. If borrowers simply repaid in accordance with the underlying loan obligations, then no unscheduled principal proceeds would be received. As such, the contract merely provided for the contingency that such unscheduled principal proceeds be received and did not create new entitlements on the part of the Senior Noteholders. The Court observed that if the Rating Agencies took the view (through the conferment of an AAA rating) that there was no insolvency risk to the Senior Noteholders and that they would be paid in full and on time, there did not seem to be a good reason to prohibit reinvestment simply due to a downgrade that happened years ago and which was no longer extant.




For further information, please contact:


Choon Yuen Hui, Partner, WongPartnership
[email protected]


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