Tael One Partners Ltd v Morgan Stanley & Co International Plc

As Sir William Blackstone said in his Commentaries (Vol II, xxx, 456):-

“Unless money … can be borrowed, trade cannot be carried on: and if no premium were allowed for the hire of money, few persons would care to lend it.”

Loan agreements will therefore entitle the lender to charge interest on the principal sum. They may also entitle the lender to charge and oblige the borrower to pay a further sum at the time of repayment. This may be known as a “Payment Premium”. If a lender sells a loan to a Buyer, the Buyer will pay a commercial rate for that loan; any interest due from the borrower but unpaid at the date of completion of the sale may be part of the price which the Buyer will pay on completion. If there is a Payment Premium due on repayment of the loan, a question may arise whether the Buyer should account to the Seller for any part of that Payment Premium which can be said to be attributable to the period before completion of the sale. That all depends on the terms of the sale of the loan which in the present case was on the Standard Terms and Conditions for Par Trade Transactions of the Loan Market Association (“the LMA Terms”). The judge has held that, on the true construction of these terms, the Seller can recover an appropriate part of the Payment Premium but, recognising that the LMA Terms are widely used in the lending industry, has given permission to appeal to this Court.

I can take these almost verbatim from the judgment. By a facility agreement originally dated 16^th April 2009 but subsequently novated, amended and restated as of 26^th November 2009 (“the Facility Agreement”) the claimant (“Tael”) agreed to participate, together with a number of other lenders, in the advance of a US$ 100 million syndicated loan to Finspace SA (“the Borrower”). Tael’s participation in the Facility Agreement varied over time but from 30^th November 2009 it was in an amount of US$ 32 million. The loan facility was for 24 months and provided for payment of interest at a rate of 11.25% per annum, accruing daily but payable 3 monthly in arrears. It also provided for a “Payment Premium” to be paid by the Borrower at the same time as repayment of the capital of the loan, which enhanced the rate of return to the lenders to a total of 20% p.a. (or in some circumstances 17%).

The Facility Agreement, by clause 24, permitted a lender to transfer part or all of its participation. In January 2010 Tael transferred US$ 11 million, out of its total US$ 32 million participation, to Morgan Stanley. The transfer was documented in a transfer certificate dated 14^th January 2010 and was subject to the terms of a LMA Trade Confirmation dated 14^th January 2010 which incorporated the LMA Terms. The confirmation defined the trade date and the settlement date as 14^th January 2010, and confirmed that payment was to be made on the settlement date. A purchase price letter was also executed on 14^th January 2010 by both parties. It provided that in accordance with the LMA Terms the amount payable by Morgan Stanley was agreed to be as set out in the Schedule. The schedule to the purchase price letter provided that the total purchase price due to Tael from Morgan Stanley was US$ 11 million plus accrued interest for the period between 16^th October 2009 and 14^th January 2010 in an amount of US$ 309,375.00. It did not provide for any further payment; in particular it did not provide for any payment in respect of Payment Premium, a fact much emphasised by Morgan Stanley the Buyer.

In March 2010 Morgan Stanley sold its participation in the Facility Agreement to Spinnaker Global Strategic Fund Limited (“Spinnaker”).

On 16^th December 2010 the US$ 100 million loan was repaid, being refinanced in full. Under the terms of the Facility Agreement, upon that event the Borrower was required to pay the Payment Premium to the relevant lenders. The Payment Premium was paid in full by the Borrower to all lenders on the record as at 16^th December 2010. Those lenders included Tael which was still a participant in the loan and Spinnaker but not Morgan Stanley.

Tael claims that in accordance with the LMA Terms, Morgan Stanley is required to pay to it that proportion of the Payment Premium in respect of Tael’s US$ 11 million participation which had accrued as at the Settlement Date of 14^th January 2010. Tael originally calculated this sum as being US$ 729,791.00 but the judge assessed the correct sum to be US$ 615,597.00 and no question now arises as to the precise amount (if any) for which judgment is to be given.

By clauses 10 and 11 interest was payable on the outstanding principal at a rate of 11.25% per annum three months in arrears. Clause 11.1(a) provided that interest accrued from the date of advance of funds.

By clause 34.3:-

“Any interest, commission or fee accruing under a Finance Document will accrue from day to day and is calculated on the basis of the actual number of days elapsed and a year of 360 days or, in any case where the practice in the Relevant Interbank Market differs, in accordance with that market practice.”

In addition the Payment Premium was to be paid together with repayment of the capital. Payment Premium was defined in the agreement as follows:-

““Payment Premium” means, in relation to any repayment or prepayment of any Loan in full, or any repayment or prepayment of a Lender’s participation in any Loan in full, an additional amount in US Dollars in respect of a Lender and its share of such Loan which, together with the repayment or prepayment of principal, payment of accrued interest and payment of any applicable Break Costs at such time, if any, equates to an internal rate of return for that Lender on its share or participation in or funding of the relevant Original Loan Amount equal to the Loan IRR calculated, with respect to each Lender, from the date of disbursement by such Lender up to the date of repayment or prepayment in full, …

For the avoidance of doubt, (i) the applicable Payment Premium for each Lender shall be calculated based on its share or participation in or funding of the Original Loan Amount and taking into account any partial repayment or prepayment of the Loan in respect thereof and (ii) in relation to any assignment or transfer of a Lenders rights pursuant to clause 24 (Changes to the Lenders) the applicable Payment Premium for each Transferee Lender shall be equal to the proportion of the Payment Premium otherwise due to the Existing Lender which had assigned or transferred its rights to the Transferee Lender to the extent such Payment Premium is attributable to such assigned or transferred rights.”

The definition of Loan IRR was as follows:-

““Loan IRR” means:-

a)

in respect of a Lender that has not exercised the Lender Prepayment Option, 20% per annum; and

b)

in respect of a Lender who has exercised Lender Prepayment Option, 17% per annum,

being in each case the applicable percentage equal to the internal rate of return with respect to the Loans for each Lender.”

The reference to Lender Prepayment Option is to clause 8.2, which in effect permitted a lender to call upon the Borrower to prepay that lender’s share on 90 days notice.

It was common ground between the parties that the Facility Agreement provided for the Payment Premium to be paid at the same time as, and together with, repayment of the principal of the loan in all circumstances in which the loan might come to be repaid or prepaid, including where there was acceleration by virtue of default. This was the effect of clauses 6.1, 7.3(a), 8.1(b), 9.2(c) and 23.2(b). The different circumstances in which a Payment Premium would become payable with repayment or prepayment were set out in these separate clauses. Importantly for the present dispute, the amount of Payment Premium might vary, depending upon which clause was operative and when the repayment or prepayment of capital fell to be made.

Clause 6.1 provided:-

“The Borrower shall repay the Loans in full on [24 months from utilisation] together with the Payment Premium relating to such amount.”

Clause 7.3(a) provided:-

“… the Borrower may … prepay the whole or any part of a Loan, plus accrued and unpaid interest, if any, up to the prepayment date, together with the Payment Premium relating to such amount in the case of prepayment of the Loans in full, [upon 10 days prior written notice].”

Clause 8.1 provided that upon the occurrence of a Change of Control the Borrower would be obliged to prepay the loans in full, including the Payment Premium.

Clause 8.2 contained the Lender Prepayment Option referred to above. Such prepayment would require payment of the Payment Premium by virtue of clause 9.2, but in this case it would be calculated so as to give an internal rate of return of 17% per annum, rather than the 20% which the lender would receive in all the other circumstances in which repayment of principal fell to be made.

Clause 9.2 provided:-

“Interest, Payment Premium and other amounts

a)

Any prepayment (including principal and Payment Premium) under this Agreement shall be made together with accrued interest on the amount prepaid, Break Costs and all other amounts accrued under the Finance Documents…

b)

In the case of any repayment or prepayment … of any Loan prior to the date falling 9 months after the Initial Utilisation Date, the Payment Premium payable shall be calculated as if such repayment or prepayment had been made on the date falling 9 months after the Initial Utilisation Date.

c)

For the avoidance of doubt the Payment Premium shall be paid by the Borrower to each relevant Lender:-

i)

In the case of any repayment or prepayment of the Loans in full, at the time of and together with such repayment or prepayment; and

ii)

In the case of any repayment or prepayment of any Lender’s participation in any Loan in full (including any prepayment pursuant to Clause 7 (illegality and voluntary prepayment) and Clause 8 (Mandatory prepayment)), at the time of and together with any such repayment or prepayment.”

Clause 23.2 dealt with acceleration of the loan upon the occurrence of events of default. Clause 23.2(b) provided that upon such events the lenders should be entitled to the Payment Premium, in addition to principal and accrued and unpaid interest, Break Costs (if any) and any other amounts due under the Finance Documents.

The Break Costs referred to in clauses 9.2 and 23.2(b) were defined to comprise the difference between (i) interest at 11.25% for the remainder of any three month period since the last interest payment and (ii) the amount the Lender would earn on deposit in the relevant interbank market for the remainder of that interest period.

The judge held that the Payment Premium was similar to interest and performed an analogous function:-

“The cost of borrowing to the Borrower is more than 11.25%. However only 11.25% is to be paid out of cash flow three monthly in arrears. The remainder is deferred and is repayable whenever the loan falls to be repaid to a particular lender or all the lenders. This is the structure of the total return to the lenders in return for making the advance. The payment premium is therefore part of the consideration charged by each lender in return for making its portion of the loan available. It is calculated by reference to the period for which the Borrower has the use of the money in just the same way as is the entitlement to “interest” described as such. The difference in commercial terms from the Borrower’s point of view is that the deferred payment obligation in relation to the Payment Premium assists with the Borrower’s cash flow in not having to meet interest payments in full during the currency of the loan, but only having to pay the full cost of borrowing upon the repayment of the loan in full to each lender.”

The total cost of borrowing, and the return to a lender, may vary in amount depending on the circumstances in which repayment or prepayment falls to be made. There are three variables in particular. One is that if clause 8.2, the Lender Prepayment Option, is exercised the applicable total rate of return will be 17% per annum rather than 20% per annum payable in other circumstances. The second is that if the prepayment/repayment occurs in the first nine months the rate of return is calculated over a nine month period (clause 9.2(b)). Thirdly, some of the circumstances giving rise to repayment or prepayment involve the payment of Break Costs. The calculation of Payment Premium falls to be undertaken after such Break Costs have been taken into account. The calculation of the Payment Premium will therefore only be capable of being performed by applying the internal rate of return of 17% or 20% respectively to figures which are ascertainable by reference to events giving rise to the repayment or prepayment.

Condition 7.1 provides:-

“The transaction shall be settled on the Settlement Date by the taking of all necessary action to complete the transaction.”

Condition 7.3 provides:-

“The action necessary to complete a transaction shall include the payment for the Purchased Assets on the Settlement Date…”

Condition 11 deals with interest payments and fees. Condition 11.1 provides:-

“All interest and fees referred to in this Condition 11 which are expressed to accrue by reference to time elapsed are based on the rates contained in the Credit Agreement.”

Condition 11.2 covers circumstances in which the parties have agreed that the transfer is to be settled without accrued interest. That does not apply in this case. Condition 11.3 provides for the situation in which, as in this case, the parties have specified “Paid on Settlement Date” in their agreed terms. In those circumstances Condition 11.3 provides:-

“(a)

… the Buyer shall pay to the Seller on the Settlement Date an amount equal to the amount of any interest or fees accrued up to but excluding the Settlement Date in respect of the Purchased Assets (other than (i) PIK Interest and (ii) the fees referred to in paragraph (b) of Condition 11.9 (Allocation of interest and fees) which are payable after the Trade Date).

(b)

… if, on or after the Settlement Date, any interest or fees accrued up to but excluding the Settlement Date in respect of the Purchased Assets are paid to the Seller, the Seller shall promptly after receipt pay a corresponding amount to the Buyer.”

Condition 11.9 entitled “Allocation of interest and fees” provides

“Unless these condition otherwise provide …

(a)

any interest or fees … which are payable under the Credit Agreement in respect of the Purchased Assets and which are expressed to accrue by reference to the lapse of time shall, to the extent that they accrue in respect of the period before (and not including) the Settlement Date, be for the account of the Seller and, to the extent they accrue in respect of the period after (and including) the Settlement Date, be for the account of the Buyer …

(b)

all other fees shall, to the extent attributable to the Purchased Assets and payable after the Trade Date, be for the account of the Buyer.”

Mr David Wolfson QC on behalf of Morgan Stanley submitted:-

On behalf of Tael, Mr Richard Handyside QC accepted that he could not bring Tael’s claim within Condition 11.3(a) because the Payment Premium had not accrued on the settlement date but submitted

I cannot accept that Condition 11.9(a) imposes an extra requirement to the requirements of Condition 11.3(a). The words “which are expressed to accrue by reference to the lapse of time” merely echo the introductory Condition 11.1 which provides (probably unnecessarily) that the interest and fees referred to in Condition 11 “which are expressed to accrue by reference to time elapsed” are based on the rates contained in the Credit Agreement. The Payment Premium is, in any event, an amount which is “expressed to accrue by reference to time elapsed” since it is an

“additional amount … which together with [other sums] equates to an internal rate of return equal to the Loan IRR calculated … from the date of disbursement up to the date of payment or prepayment.”

As far, therefore, as the Payment Premium itself is concerned, there would be no problem presented by the words “expressed to accrue by reference to the lapse of time”, even if they did constitute an extra requirement. But, as Mr Handyside for Tael pointed out, if they did constitute an extra requirement, some fees such as a commitment fee or an arrangement fee (if unpaid) would probably not fall within the requirement and yet must be contemplated as being payable, since they will definitely have accrued before any settlement date. To my mind this shows that the words “expressed to accrue by reference to the lapse of time” whether in Condition 11.1 or 11.9(a) are words not of limitation but merely words of description designed to encompass the interest and fees that are payable by reference to those parts of Condition 11 which impose obligations.

Nor, however, can I accept that Condition 11.9(a) constitutes any extra entitlement beyond what is said to be payable in Condition 11.3(a). Condition 11.9(a) is headed “Allocation of interest and fees” and, in marked contrast to other conditions of the LMA Terms does not use the words “shall pay”, “payment”, “be payable” or “paid” but uses the phrase “shall be for the account of …”. That phrase is entirely apt to describe how sums already decided to be payable should be dealt with in any accounting exercise undertaken by the parties when such obligations are already imposed by other conditions. I have in mind Conditions 7.3, 10.2, 11.2(a), 11.3(a) itself, 11.3(b), 11.5, 11.8, 14(a) and 14(b) which all use variants of “pay”, “paid”, “payable” and “payment”. Five of these examples occur in Condition 11 itself and it would be odd, if Condition 11.9(a) was intended to create an extra entitlement, that it should be the one condition in which the phrase “for the account of” should be used.

In this connection, one cannot help being struck by the fact that if Condition 11.9(a) were intended to confer an extra entitlement in respect of sums not accrued by the settlement date but only accruing thereafter (albeit by reference to a period before the settlement date) the contract specifies no mechanism for the implementation of such entitlement. It so happens that, in the present case, Tael retained part of the loan it originally made and therefore knew when the loan was repaid. If Tael had sold the whole of the loan, it would not know when the loan was repaid. It would be necessary to imply into the sale and purchase agreement a term that the buyer would inform the seller when the loan was repaid; otherwise the seller would not know when he could make a claim for the Payment Premium. If, moreover, as in the present case, Morgan Stanley had disposed of the whole loan to another party (such as Spinnaker) one would have not only to imply a term into that sub-sale contract to the same effect but also a further term into the Tael/Morgan Stanley agreement that Morgan Stanley would enforce the implied term in their own sub-sale contract. It is difficult to think that this series of implications could have been intended. This of itself, to my mind, militates against Condition 11.9(a) constituting an entitlement to sums not accrued at the settlement date.

Another difficulty with the argument, that Condition 11.9(a) gives rise to an entitlement in respect of sums that have not accrued by the settlement date but which accrue thereafter by reference to a period before the settlement date, is that the Payment Premium may not in fact be paid at the termination of the loan. That may be because, for example, there is an earlier default or because the Borrower has insufficient funds to pay when payment is due. On Tael’s argument the Payment Premium which will have accrued due on default or termination will be due and will to some extent have accrued in respect of the period before the settlement date. It will then (on this argument) be “for the account of the Seller”. If this phrase means that the Buyer must pay it when it falls due, the Buyer will be accountable for (and will have to pay out) money he has never received. Mr Handyside said that it was no part of his argument that the Buyer would have to pay money he had not received but it is difficult to see that that can be right on the wording of Condition 11.9(a); to achieve that there would have to be some implication that the words “for the account of the Seller” extended only to sums if and when they were received by the Buyer. But it is more natural not to read the words of Condition 11.9(a) as giving rise to any entitlement beyond that which is conferred by Condition 11.3(a), rather than as giving rise to an entitlement which then has to be restricted by some implication.

The judge (para 33) pointed out that while Condition 11.3(a) referred to “fees accrued up to … the Settlement Date”, Condition 11.9(a) referred to “fees … to the extent that they accrued in respect of the period before the Settlement Date”. He then said that Condition 11.9(a) addressed interest and fees which might accrue at a later date but which accrue in respect of the period before the Settlement Date and would be essentially redundant if it merely defined the allocation of fees and interest which fell to be paid for under Condition 11.3(a).

This is the most persuasive argument available to Tael and is, no doubt, why Mr Wolfson sought to give Condition 11.9(a) a meaning of its own which, as it turns out, would restrict the widths of Condition 11.3(a). I have already rejected that possible construction of Condition 11.9(a) and would accept that, despite the difference of wording to which the judge has drawn attention, the clause may be effectively redundant, in most circumstances. It could perhaps apply in cases where interest was deferred to or capitalised on a date subsequent to the Settlement Date but such interest would be likely to be caught by the definition of “PIK Interest” in the LMA Terms for which separate provision is made in Condition 11.11. (The judge (paras 37-40) thought that the provisions about PIK Interest themselves supported his construction of Condition 11.9(a) but the fact that special provision is made for such interest militates against a construction which means that the Seller would get such interest in any event under Condition 11.9(a) and Mr Handyside in oral argument did not seek to support the judge’s reliance on the PIK Interest provisions).

One is left in the position therefore that Condition 11.9(a) probably adds little or nothing to the rights conferred on the Seller by Condition 11.3(a). That is not altogether surprising in a 20 page document of some complexity. I have already pointed out that Condition 11.9 is itself reflected in Condition 11.1 which is itself probably redundant. In the light of the difficulties referred to in paras 30 and 31 above, I do not regard the argument of redundancy as particularly compelling.

The second main reason why the judge (para 35) accepted the Seller’s argument that Condition 11.9(a) conferred an extra right to sums which had not accrued by the settlement date was that the Buyer would receive an uncovenanted windfall if he was entitled to retain the Payment Premium which, as the judge had already pointed out, was really “interest” under another name. The fact that the Purchase Premium Letter quantifies the accrued interest payable on the settlement date makes it difficult, of course, to argue that the Payment Premium is, in fact, further payable interest. But the judge’s windfall point does need to be addressed.

On the facts of the present case there is no windfall received by Morgan Stanley since they sold the loan on to Spinnaker. One does not know whether Spinnaker received the Payment Premium or whether it was received by some sub-purchaser. But it is possible that someone down the line has indeed received something of a windfall. But the Seller can always build the fact that he is not going to receive the Payment Premium into the price he asks for the sale of the loan. In the present case Tael appears not to have done that, because the purchase price and the loan are identical in amount (US$ 11,000,000.00). But, if market conditions allowed, Tael could have chosen to charge a higher amount which could have reflected the fact that it was not going to recover the amount of the Payment Premium referable to the period during which it was a lender.

The fact is that, if the parties had intended the Seller to recover any part of the Payment Premium from the Buyer, one would expect it to be mentioned in the Purchase Price Letter of 14^th January 2010 as part of the purchase price especially since that letter records that the amount payable “in accordance with the LMA Standard Terms and Conditions … has been calculated and agreed as shown in the schedule to this Purchase Price Letter”. The schedule itemises the amount of the loan and the accrued interest but says nothing about the Payment Premium. It is only because the Purchase Price Letter refers to the Confirmation of 14^th January 2010 and that Confirmation states that the transaction is subject to the Standard Terms and Conditions for Par Trade Transactions of the LMA which are incorporated in the Confirmation that the Seller’s reliance on Condition 11.9(a) of those terms can get off the ground. For the reasons given, however, I do not think that the Seller can obtain a better or more extensive price than that set out in the schedule attached to the Purchase Price Letter.

It may well be that both the parties and the LMA Terms have overlooked the fact that loan agreements may sometimes contain provisions about a Payment Premium but that fact, even if true, cannot affect the true construction of the contract which the parties have made. I would, therefore, allow this appeal, set aside the judge’s order and dismiss Tael’s claim.

I agree.

I also agree.