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

This is a claim for a declaration as to the meaning of a provision in one of the documents governing a collateralised loan obligation structure (“the CLO”), pursuant to which on 23 August 2006 the first defendant (“the Issuer”) raised €602 million through the issues of 14 classes of notes (“the Notes”).

The practical significance of the proceedings, and their urgency, is that there is a dispute as to whether on 15 April 2014 a substantial sum of money representing Unscheduled Principal Proceeds (“UPP”), as defined in the CLO documentation, are available to be reinvested or should be paid out to noteholders under the CLO’s waterfall provisions (viz. the provisions setting out the order of priority for payments). The amounts in issue are substantial. The claimant, which is a junior noteholder, contends that the UPP are available for reinvestment. The fourth defendant (“the Trustee”), which acts as trustee of the Notes for the benefit of the noteholders, contends on behalf of the senior noteholders that the CLO documentation precludes reinvestment. It is supported in that argument by the second defendant, which is the Collateral Administrator of the Notes (“the Collateral Administrator”). Neither the Trustee nor the Collateral Administrator has an economic interest in securing the outcome for which they contend.

The third defendant, which is the Collateral Manager of the Notes (“the Collateral Manager”), takes a neutral position as does the Issuer.

The dispute turns on the narrow question whether the provision in the definition of the “Reinvestment Criteria” in schedule 2 to the Collateral Management Agreement (“the CMA”) that “the ratings of the Class A1 Notes have not been downgraded below their Initial Ratings” is unsatisfied because those Notes (“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 CLO is a securitisation of underlying loan assets. The principal documents governing the CLO, all of which were entered into on 23 August 2006, comprise a trust deed constituting the Notes (“the Trust Deed”), the CMA between the Issuer, the Collateral Manager and the Trustee, and a collateral administration agreement between, among others, the Collateral Administrator, the Collateral Manager and the Trustee. Schedule 3 to the Trust Deed incorporates the conditions of the Notes, which were set out in the offering circular dated 21 August 2006.

The 14 classes of Notes issued on 23 August 2006 are divided into two sets of Senior Notes, seven sets of mezzanine Notes and 5 sets of subordinated junior Notes (“the Junior Notes”). They have a maturity date of 2022 but the offering circular makes clear that it is anticipated that they will be repaid or redeemed before then. Under the waterfall provisions of the CLO each of the classes of Notes is subordinated to the payments of principal and interest on the class of Note above them in the structure.

The Senior Notes were, at the time of their issue, rated AAA by Fitch Ratings Limited and S&P. That rating was a condition of the issue and sale of the Notes. This was their “Initial Rating” as defined in the CLO documentation.

The sums raised by the issue of the Notes together with sums advanced by one class of senior noteholders were applied (after payment of fees and expenses) in the purchase of a portfolio of loans and participations in loans (“the Portfolio”) described in the CLO documentation as “Collateral Obligations”.

Proceeds arise under the Portfolio from three principal sources: payment of interest on the Collateral Obligations, sale of the Collateral Obligations, and repayment of the Collateral Obligations by the borrower. Such repayments can either be scheduled (defined as “Scheduled Principal Proceeds”) or unscheduled if they are repaid before the maturity of the underlying obligation. Such unscheduled repayments are UPP. Sales proceeds, Scheduled Principal Proceeds and UPP are all types of “Principal Proceeds” as defined in the CLO documentation.

The CLO documentation specifies the following periods when investment or reinvestment in Collateral Obligations is permitted. First, there is the Ramp-Up Period, which (subject to an immaterial qualification) was between “the Closing Date” (23 August 2006) and “the Effective Date” (23 May 2007). During that period the Collateral Manager was obliged to use all commercially reasonable efforts to ensure that amounts standing to the credit of the “Unused Proceeds Account” were applied in the acquisition of Collateral Obligations. Secondly, there was “the Reinvestment Period”, which was between the Closing Date (23 August 2006) and “the Payment Date” falling in October 2013 (15 October 2013). The Payment Dates are the 15^th day of January, April, July and October or the next “Business Day” if the 15^th is not a Business Day. Thirdly, there is a period between the end of the Reinvestment Period (15 October 2013) and the Payment Date falling in October 2015. The claimant has described that period as “the Additional Reinvestment Period” in its submissions. I shall do the same in this judgment.

Clause 11 of the CMA provides for the sale and, in certain circumstances, reinvestment by the Collateral Manager of certain types of Collateral Obligation. Clause 11.1 deals with the sale of “Credit Impaired Collateral Obligations”; clause 11.2 with the sale of “Defaulted Collateral Obligations”; clause 11.3 with the sale of “Appreciated Collateral Obligations”; and clause 11.4 with the discretionary sale of Collateral Obligations. In each case a pre-condition of reinvestment is that “no Event of Default [has] occurred which is continuing”. “Events of Default” are matters such as non-payment of interest or principal and the occurrence of certain solvency events.

So far as relevant to these proceedings, clause 11.6 provides that during the Reinvestment Period the Collateral Manager shall use all commercially reasonable efforts to apply Scheduled Principal Proceeds in the acquisition of further Collateral Obligations satisfying the Reinvestment Criteria “subject to no Event of Default having occurred which is continuing”. After the Reinvestment Period, however, all Scheduled Principal Payments are to be paid to noteholders in accordance with the waterfall provisions of the CLO.

Clause 11.5 deals with the application of UPP, with which these proceedings are concerned. It provides that during the Reinvestment Period and the Additional Reinvestment Period the Collateral Manager shall apply UPP as follows in the acquisition of further Collateral Obligations satisfying the Reinvestment Criteria:

“11.5

Unscheduled Principal Proceeds

(a)

During the Reinvestment Period and up to and including the Payment Date in October 2015, the Collateral Manager (acting on behalf of the Issuer) shall use all commercially reasonable efforts to apply the Unscheduled Principal Proceeds received in the related Payment Period with respect to any Collateral Obligation … in the acquisition of further Collateral Obligations satisfying the Reinvestment Criteria, subject to:

(i)

no Event of Default having occurred which is continuing; and

(ii)

the Collateral Manager certifying to the Trustee that in its professional opinion such Unscheduled Principal Proceeds can be reinvested in further Collateral Obligations which it has identified in compliance with the Reinvestment Criteria.”

Clause 11.5(b) provides, so far as relevant, that after the Payment Date in October 2015 all UPP shall be paid to noteholders in accordance with the waterfall provisions of the CLO.

Clause 11.7 of the CMA requires reinvestment of UPP within three Payment Periods after receipt. If they are not so reinvested, the UPP will be applied in redemption of the Notes in accordance with the waterfall provisions of the CLO.

The Reinvestment Criteria are set out in paragraphs 1 to 8 of schedule 2 to the CMA under the heading “Reinvestment Criteria”. Paragraphs 1 to 4 of the definition of Reinvestment Criteria, which are the relevant paragraphs for the purpose of this judgment, are as follows:

“Reinvestment Criteria

The Reinvestment Criteria are as follows:

(1)

such further Collateral Obligation is a Collateral Obligation which satisfies each of the Eligibility Criteria;

(2)

during the Reinvestment Period only, either (i) the Coverage Tests are satisfied after giving effect to such purchase or (ii) if immediately prior to such purchase any Coverage Test was not satisfied, the related value is maintained or improved after giving effect to such purchase provided that, notwithstanding this paragraph, the Coverage Tests must be satisfied upon any reinvestment of Scheduled Principal Proceeds and of Sale Proceeds from Defaulted Collateral Obligations during the Reinvestment Period;

(3)

after the Effective Date and during the Reinvestment Period only, either (i) after giving effect to such purchase, the Collateral Obligations in aggregate satisfy the requirements of the Portfolio Profile Tests or (ii) if any such requirement is not satisfied prior to such purchase, such requirement will be maintained or improved after giving effect to such purchase;

(4)

after the Reinvestment Period and until the Payment Date in October 2015 only, in the case of the reinvestment of Unscheduled Principal Proceeds, (i) the ratings of the Class A1 Notes have not been downgraded below their Initial Ratings, (ii) all the requirements of Portfolio Profile Tests shall be satisfied both prior to and after giving effect to such purchase, (iii) all the Coverage Tests shall be satisfied both prior to and after giving effect to such purchase; (iv) the expected maturity of the additional Collateral Obligation is not beyond the expected maturity of the Collateral Obligation which was the source of such Unscheduled Principal Proceeds and (v) the Scenario Default Rate for the Proposed Portfolio is equal to or lower than the Scenario Default Rate for the Current Portfolio or where the Scenario Default Rate for the Proposed Portfolio is higher than the Scenario Default Rate for the Current Portfolio, a Rating Agency Affirmation has been received from S&P;”

As I have said, the critical provision for the purpose of these proceedings is paragraph 4(i) of that definition of Reinvestment Criteria (“Paragraph 4(i)”).

The Eligibility Criteria are set out paragraphs 31 to 52 of schedule 2 to the CMA. They provide that the Eligibility Criteria will be met if the applicable criteria are satisfied “at the date of acquisition of such Collateral Obligation”. For the purpose of the present dispute, nothing turns on the definition of the Eligibility Criteria.

Condition 3(c) of the Notes contains the waterfall provisions specifying the priority ranking for payments, including as between the different classes of noteholders. It draws a distinction between “Interest Proceeds” and “Principal Proceeds”. It is sufficient for the purpose of this judgment to refer to the priority for Principal Proceeds, which include UPP. Without attempting complete accuracy, the order of priority is, for illustrative purposes and very broadly speaking, as follows: (1) amounts outstanding in respect of certain taxes, expenses and management fees; (2) interest due on the Senior Notes; (3) redemption of the Notes if there has been an “Effective Date Rating Event” which is continuing; (4) redemption of the Notes with UPP received after the Reinvestment Period which is not reinvested; (5) redemption of the Senior Notes; (6) interest on, and redemption of, the other Notes in the order of their ranking.

In view of submissions which were made on the provisions for application of the Principal Proceeds when there has been an “Effective Date Rating Event”, it is necessary to refer to the following provisions in the CLO documentation relating to such an event. So far as relevant to these proceedings “Effective Date Rating Event” is defined as follows in the Notes:

“Effective Date Rating Event” means:

(a)

any of (i) the Effective Date Requirements not having been satisfied as at the Effective Date; or (ii) the Initial Ratings of any of the Notes being downgraded or withdrawn or (iii) any of the Rating Agencies notifying the Collateral Manager on behalf of the Issuer that such Rating Agency intends to reduce or withdraw any of its Initial Ratings of the Notes, in the case of (ii) and (iii), upon request for confirmation of the Initial Ratings by the Collateral Manager, acting on behalf of the Issuer, following the Effective Date; …”

Condition 3(c)(GG) of the Notes provides that the Principal Proceeds will be applied:

“on the Payment Date following the Effective Date and each Payment Date thereafter to the extent required, in the event of the occurrence of an Effective Date Rating Event which is continuing on the second Business Day prior to such Payment Date, to redeem pari passu and pro rata the Class A1 Notes in accordance with the Class A1 Notes Principal Sequence of Payments, and thereafter, pari passu and pro rata the Class A2 Notes, and thereafter, pari passu and pro rata the Class A3 Notes, and thereafter, pari passu and pro rata the Class A4 Notes, and thereafter, pari passu and pro rata the Class B1 Notes, and thereafter, pari passu and pro rata the Class B2 Notes, in each case, until redeemed in full or, if earlier, until the Rating Agencies confirm the Initial Ratings of the Notes;”

That condition is mirrored in condition 7(d) of the Notes a follows:

“Redemption upon Effective Date Rating Event

In the event that, as at the second Business Day prior to the Payment Date following the Effective Date and any Payment Date thereafter, an Effective Date Rating Event has occurred and is continuing, the Notes shall be redeemed in accordance with the Priorities of Payment on such Payment Date out of Interest Proceeds and thereafter Principal Proceeds, in each case, until redeemed in full or, if earlier, until the Rating Agencies confirm the Initial Ratings of the Notes. For the avoidance of doubt, the Collateral Manager (acting on behalf of the Issuer) is under no obligation whatsoever to present a Rating Confirmation Plan to the Rating Agencies and may, in its discretion (acting on behalf of the Issuer), determine not to present such plan to the Rating Agencies in favour of redemption of Notes pursuant to this Condition 7(d) (Redemption upon Effective Date Rating Event). For the avoidance of doubt, the redemption of any Class A1 Notes shall be made in accordance with the Class A1 Notes Principal Sequence of Payment.”

Clause 10.5 of the CMA, which concerns the acquisition of Collateral Obligations during the Ramp-Up Period with sums subscribed for the Notes which have not been used, also contemplates the possibility of an Effective Date Ratings Event. It provides as follows:

“10.5

If on the Effective Date no Effective Date Ratings Event has occurred and so long as an Effective Date Rating Event is not continuing and there are amounts standing to the credit of the Unused Proceeds Account, the Collateral Manager may at its discretion, acting on behalf of the Issuer, ensure that such amounts which are to be transferred to the Principal Account are utilised to purchase further Collateral Obligations.”

The Reinvestment Period ended on 15 October 2013. Between 8 October 2013 and 8 January 2014 UPP amounting to €7,638,657.45 were received. Those UPP were not reinvested on the Payment Date which occurred on 15 January 2014 because, among other things (viz. non-satisfaction of other conditions), the Collateral Administrator decided that the Reinvestment Criteria were not met in view of the rating downgrade which had occurred between 5 February 2010 and 30 November 2012. In other words, the Collateral Administrator was of the view that Paragraph 4(i) was not satisfied. The UPP were used towards redemption of the Notes.

That decision has prompted these proceedings by the claimant. Further UPP amounting to €11,758,108 were received between 8 January 2014 and 21 February 2014. It is reasonable to think that there will be further substantial UPP receipts before the end of the Additional Reinvestment Period on the Payment Date in October 2015.

The claimant considers that, if the UPP are reinvested, that would benefit the junior noteholders. If, on the other hand, the UPP are applied towards the redemption of the Notes in accordance with the waterfall provisions of the CLO, the junior noteholders will not receive any benefit.

So far as the senior noteholders are concerned, it is in their interest that the Senior Notes be redeemed early so that they can invest in new notes with a similar AAA rating but which will, in view of changes in the market since 2006, pay a greater margin than the EURIBOR + 0.2% paid by the Issuer on the Senior Notes.

A witness statement has been made on behalf of each of the parties. The witness statement of Mr Jonathan Montanaro, for the Collateral Administrator, contains his opinion on what “most market participants would instinctively understand” Paragraph 4(i) to mean. He also gives evidence of wording used in other (unidentified) note programmes between December 2006 and December 2008 “which have contained a similar concept of Reinvestment Criteria”. He expresses his views about certain provisions in the documentation used in those note programmes and about the “business sense” of the rival interpretations of Paragraph 4(i).

The witness statement of Mr Olufemi Oye, for the Trustee, refers to and exhibits a letter from the London branch of JP Morgan Chase Bank N.A. (“JP Morgan”), a senior noteholder. That is an eight page letter in which JP Morgan in effect argues its case as to the proper interpretation of Paragraph 4(i), including stating what alternative expressions the drafter could have used for a different outcome, and giving its view as to market practice and the commercial rationale for the interpretation of Paragraph 4(i) for which it contends.

Mr Oye states that the Trustee is in full agreement with the views expressed by JP Morgan on the correct construction of Paragraph 4(i) and “notes that [JP Morgan’s] experience of the wider market is supportive of those views”.

In answering those witness statements Mr Martin Hornbuckle, for the claimant, gives his “synopsis of the life-cycle of a CLO”. He also gives a description and his explanation of the structure of a CLO and his opinion of the view of the market about credit ratings, ratings downgrades and the rationale and meaning of Paragraph 4(i) and similar provisions. He exhibits an email thread which, he says, corroborates his views. He has redacted the name of the sender of the email who he describes as “a leading market trader and investor at a reputed investment bank and a leading participant in the European CLO market”. All of that, he contends, supports the correctness of the claimant’s interpretation of Paragraph 4(i). He refers to a number of other CLO transactions currently in the market.

There has been no direction for expert evidence in these proceedings. None of the makers of the witness statements was requested to attend for cross-examination.

The witness statements of Mr Montanaro, Mr Oye and Mr Hornbuckle appear to have been made with scant regard for the appropriateness and admissibility of their contents. In JD Wetherspoon plc v Harris [2013] EWHC 1088 (Ch), [2013] 1 WLR 3296 I drew attention to the need for witness statements to comply with paragraph 7 of Appendix 9 to the Chancery Guide 7^th ed (2013). What is said there is no more than an elaboration of what is stipulated in CPR 32.4(1), namely that a witness statement should contain the evidence which its maker would be allowed to give orally. A witness statement is not the place for arguing the legal merits of the case, and, in particular, in the context of the present proceedings about the interpretation of a document, expressing the maker’s own view as to what the document means. Neither Mr Robert Miles QC, for the claimant, nor Mr Adam Brown, solicitor advocate for the Collateral Administrator, nor Mr Richard Snowden QC, for the Trustee, sought to contend, in answer to my enquiry, that the evidence in the witness statements about the maker’s view of market opinion on any matter is admissible in the absence of a direction for expert evidence. The market’s view of the meaning of Paragraph 4(i) itself and similar provisions is in any event irrelevant and inadmissible.

Mr Brown, who adopted the submissions in the skeleton argument prepared for the Collateral Administrator by Mr. Stephen Midwinter, submitted that evidence about provisions in other note programmes as to the effect of a ratings downgrade is admissible and potentially relevant. I can see that such evidence might potentially be of some benefit if it were indisputably clear, for example, as Mr Montanaro has asserted in his witness statement, that there have been note programmes which provided that a past credit downgrade prevents further reinvestment even if there has been a subsequent upgrade. The obvious difficulty with such evidence, which is certainly applicable to Mr Montanaro’s evidence, is that it is likely to depend upon the proper interpretation of some other document, which may itself be at best a difficult exercise and probably an impossible one without seeing the entire documentation and its factual matrix. That is precisely the riposte made to the evidence of Mr Montanaro by Mr Hornbuckle, who asserts that in over 200 European CLOs that he has analysed he has “not seen a provision, within any reinvestment criteria, which is drafted or interpreted in such a way as to permanently switch off the ability of the collateral manager to reinvest following a downgrade of senior notes”. In the absence of expert evidence and cross-examination, it is plainly impossible for the court to resolve that conflict of evidence.

In short, large parts of the witness statements in the present case are of no value whatsoever in resolving the present dispute.

The principles of interpretation of documents have been the subject of continuous judicial refinement over many years. The period of modern development may be said to have begun with Lord Wilberforce’s speeches in Prenn v Simmonds [1971] 1 WLR 1381 and Reardon Smith Ltd v Yngvar Hansen-Tangen (The Diana Prosperity) [1976] 1 WLR 989. Particularly important milestones since then have been Lord Hoffmann’s summary of general principles in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 (subsequently qualified by him in Bank of Credit and Commerce International SA v Munawar Ali [2001] UKHL 8, [2002] 1 AC 251 Lord Hoffman’s speech in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 and Lord Clarke’s judgment in Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900. In the course of oral submissions I was also referred to Re Sigma Finance [2009] UKSC 2, [2010] 1 All ER 571 (SC), [2008] EWCA Civ 1303, [2009] BCC 393 (CA), Pink Floyd Music Ltd v EMI Records Ltd [2010] EWCA Civ 1429, [2011] 1 WLR 770, BMA Special Opportunity Hub Fund Ltd v African Minerals Finance Ltd [2013] EWCA Civ 416, Lewison, The Interpretation of Contracts (5^th ed), and Lord Grabiner QC, The Iterative Process of Contractual Interpretation, (2012) 128 LQR 41. Further authorities were cited in the skeleton arguments. Leaving implied terms to one side, the reported cases present a reasonably coherent jurisprudence although there will always be some cases where the application of the law gives rise to difficulty and understandable disagreement between judges as well as the parties.

I do not intend, and it would be unwise of me, to attempt a comprehensive statement of the principles of contractual interpretation to be derived from the case law. For the purposes of the present proceedings, the following points are of particular relevance. Firstly, the overriding objective of the interpretation of a contract is to ascertain the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract (excluding, for policy reasons, prior negotiations and declarations of subjective intent). Secondly, in carrying out that exercise the starting point is always the ordinary, natural and grammatical sense of the language used by the parties in its context because the assumption is that people usually intend the words they use to have their natural and ordinary meaning. The context includes the document and the transaction as a whole. Where it is clear from the context that the parties have adopted a specialist vocabulary, the starting point is the natural and ordinary technical meaning of the specialist terms. Thirdly, in cases where in its context the language used is ambiguous, in the sense that it is capable of bearing more than one meaning, that interpretation is to be preferred which is most consistent with business common sense, that is to say most consistent with the commercial purpose of the transaction. Fourthly, where it is clear both that a mistake has been made in the language used and what a reasonable person would have understood the parties to have meant, the contractual provision must be interpreted in accordance with that meaning. Fifthly, if the words in their context are unambiguous and it cannot be said that something must have gone wrong with the language, then, subject to a successful claim to rectification, the court must apply that unambiguous meaning even though some other language or meaning would be more commercial. The fact that it would produce a poor bargain for one of the parties is not sufficient to adopt another meaning. The objective of interpretation is to interpret the contract and not to re-write it in the light of hindsight and the judge’s, let alone one party’s, own notion of what would have been a reasonable solution if the parties, as reasonable people, had ever thought about it.

The principles for the interpretation of a contract are the same whether the document relates to a single commercial venture, in which the contracting parties will remain the same throughout, or the document is intended to confer rights and obligations which it is contemplated may pass to persons other than the original contracting parties, such as title documents to property or, as in the present case, tradable financial instruments. In the case of the second category, however, it is reasonable to assume that the parties will have been particularly conscious of the need for clarity and certainty in the language they have used. It is for that reason that the court should be particularly cautious about departing from the ordinary and natural meaning of the words in documents of that kind.

As I have said, the point of disputed interpretation in the present case is a very short one, namely whether, as the Trustee and the Collateral Administrator contend, Paragraph 4(i) of the Reinvestment Criteria cannot now be satisfied because the ratings of the Senior Notes were downgraded on 5 February 2010 or, as the claimant contends, Paragraph 4(i) is currently satisfied because the ratings of the Senior Notes are now no lower than their Initial Ratings.

Despite the skilful arguments of Mr Miles, it is clear, on the application of the principles I have mentioned, that the interpretation for which the Trustee and the Collateral Administrator contend is the correct interpretation. The reasons for that conclusion can be stated shortly.

Apart from the nature of credit ratings, this is a case in which, like Sigma Finance, the factual background is not really helpful in resolving the dispute and what is paramount is the wording used in the documentation interpreted as a whole in the light of the commercial intention which that documentation discloses: see Sigma Finance at [37] (Lord Collins).

On its natural and ordinary meaning in its context Paragraph 4(i) is referring to a past event and not a continuing state of affairs. Mr Miles characterised the words “have not been downgraded” as the “present perfect continuous” or something akin to that. Those words are not in fact the present perfect continuous because there is no use of the present participle, which is what conveys a sense of continuity. The words used are the present perfect indicating that something has happened at an unspecified time in the past.

The documentation as a whole provides strong support for that interpretation. The drafting of the CMA and of the conditions to the Notes makes clear when it is material that a particular state of affairs must continue in order to have a specified effect. Clauses 11.1, 11.2, 11.3, 11.4, 11.5 and 11.6 of the CMA all specify as a pre-condition of reinvestment that “no Event of Default [has] occurred which is continuing”. Specifically in relation to the possibility of a downgrading of the Initial Ratings of the Notes, clause 10.5 of the CMA provides what is to happen to amounts standing to the credit of the Unused Proceeds Account “[i]f on the Effective Date no Effective Date Rating Event has occurred and so long as an Effective Date Rating Event is not continuing”. Condition 3(c)(GG) of the Notes stipulates that the Principal Proceeds must be applied in redemption of the Notes “in the event of the occurrence of an Effective Date Rating Event which is continuing on the second Business Day prior to the [relevant] Payment Date …. until the Rating Agencies confirm the Initial Ratings of the Notes”. Similar language is used in condition 7(d) of the Notes. By contrast with Paragraph 4(i) all those expressions make clear and deliberate allowance for a material change of circumstances, including an upgrading of the ratings of the Notes following a downgrading.

The drafter has also made a conscious selection of different tenses – past, present and future – within each of the sub-paragraphs of the definition of the Reinvestment Criteria in schedule 2 to the CMA. All those tenses have been used in different parts of Paragraph 4(i) itself.

Even in relation to the specific instance of a downgrading of the Notes, the drafter has elsewhere used language to indicate a current downgrade, as in the expression “the Initial Ratings of the Notes being downgraded” in the definition of Effective Date Rating Event in the Notes.

Mr Miles advanced a raft of points in support of an interpretation of Paragraph 4(i) which focuses on the ratings of the Notes at the moment the Investment Criteria must be satisfied. Some were based on the language of the CLO documentation and others were directed at commercial purpose. It is sufficient for me to the say the following about them.

Mr Miles emphasised language in the CLO documentation, including the definition of “Collateral Obligation” in condition 1 of the Notes and the wording in schedule 2 to the CMA, indicating that the Eligibility Criteria and the Reinvestment Criteria are to be satisfied at the date the proposed investment or reinvestment is to take place. That is a given, but I do not see it assists in resolving the issue whether, at that date, Paragraph 4(i) is satisfied where there has been a downgrade of the Notes followed by an upgrade. That turns, not on the date for satisfaction of the Reinvestment Criteria, but rather on the substance of the condition that must be satisfied at that date.

Mr Miles submitted that Paragraph 4(i) requires a comparison to be made and the more natural and commercial sense is for the comparison to be with the ratings of the Notes at the time of the reinvestment. This is simply another way of putting Mr Miles’ submission on the present perfect continuous, which I reject as both grammatically inaccurate and as not reflecting the natural and ordinary meaning of the words used.

Mr Miles described the drafter as not being a “grammatical purist” because of the use of different tenses and expressions for the same concept. For the reasons I have given, I consider that the drafter has carefully selected the language and the tenses used in the CLO documentation and, in particular, making a distinction between present, future and past matters and events.

Mr Miles advanced the following points on the commerciality of the rival interpretations. He said that it is striking that, under clause 11.5(a) (which applies during the Reinvestment Period and the Additional Reinvestment Period), if there has been an Event of Default which has been cured by the date for reinvestment, then, subject to compliance with any other conditions, the UPP must be reinvested rather than go into the waterfall. He described that as a “two-way switch”. He relied also on the “two-way switch” in the conditions in the Notes if there has been an Effective Date Rating Event. Mr Miles submitted that it would be very odd if, by contrast, Paragraph 4(i) provides only for a “one-way switch” or a “once and for all switch” if the Initial Ratings are ever downgraded.

Mr Miles said that the commercial purpose of Paragraph 4(i) is to protect the senior noteholders so that, if the Senior Notes are no longer rated AAA, proceeds of the Collateral Obligations are not reinvested but are applied in accordance with the waterfall provisions. He submitted that there is no need for such protection if, at the date of the proposed reinvestment, the Senior Notes have an AAA rating.

Mr Miles reinforced that point with the submission that a note issue rating is forward-looking and takes into account all matters bearing on creditworthiness at the relevant date. He relied, for that point, on the following statement by S&P (set out in Mr Hornbuckle’s witness statement):

“A Standard & Poor’s issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects Standard & Poor’s view of the obligor’s capacity and willingness to meet its financial commitments as they come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.”

Mr Miles argued, by reference to that statement and S&P’s re-rating of the Senior Notes dated 13 November 2012, that the re-rating to AAA took into account everything that has happened, including past performance.

Mr Miles tied to all those points a general observation that there is no presumption that UPP will pass under the waterfall provisions during the Additional Reinvestment Period. On the contrary, he said, the intention underlying clause 11.5 of the CMA is that UPP will be invested until the conclusion of the Additional Reinvestment Period provided they meet the Reinvestment Criteria.

All those arguments were well presented but they fall far short of providing the court with a context for interpreting Paragraph 4(i) in the sense advocated by the claimant let alone any reason to conclude that the wording of Paragraph 4(i) was a mistake on the part of the drafter.

It is impossible for the court, certainly in the absence of expert evidence and cross-examination, to take a view in the context of the Notes on the relative significance of a past Event of Default which no longer continues, on the one hand, and a past downgrading of the ratings of the Senior Notes which have subsequently been upgraded to their former rating, on the other hand. S&P’s explanation as to its ratings policy is relevant to that issue but it is by no means determinative. It may be that the market itself does not have a single view about that issue.

Nor do the definition and the consequences of an Effective Date Rating Event in the conditions of the Notes take matters any further. That definition and conditions 3(c)(GG) and 7(d) expressly contemplate a different result where the downgrading has been reversed and where it has not. The same is true of clause 10.5 of the CMA. Not only is the language of Paragraph 4(i) materially different, but, unlike those other provisions, it is specifically directed to the Additional Reinvestment Period when all Scheduled Principal Payments are to be paid to noteholders in accordance with the waterfall provisions and the only further reinvestment that can take place is with UPP if certain conditions, including the Reinvestment Criteria, are met. It is impossible for the court to hold in the light of the admissible evidence and the documentation as a whole that it is uncommercial (or more uncommercial) to interpret Paragraph 4(i) in a way that imposes a greater restriction on the investment of UPP during that period than in earlier periods in the cycle of the CLO even in relation to a similar event (ratings downgrading). That is not the same as saying that clause 11.5 has a presumption against reinvestment. Clause 11.5 has no presumption one way or the other. The only point is whether Paragraph 4(i), if given its ordinary and natural meaning, is consistent with a rational commercial objective consistent with the transaction as a whole.

I therefore consider that Paragraph 4(i) is clear and unambiguous. It is not satisfied if the Senior Notes have at any time been downgraded below their Initial Ratings. In view of the downgrade by S&P in February 2010 it is now incapable of being satisfied.

For completeness, I should say that Mr Snowden submitted that what the claimant really seeks to do is to imply into Paragraph 4(i) additional words at the end of those already there, such as “or they have subsequently been re-graded to at least their Initial Ratings”. Mr Miles rejected the suggestion that the claimant contends for an implied term. In the circumstances, it is not necessary to consider the principles for implying contractual terms. In any event, it inevitably follows from what I have already said about the proper interpretation of Paragraph 4(i) that there is no scope for implying any such term.

For those reasons I dismiss the claim.