Replacing the special servicer on legacy CMBS DECO 15 – Pan Europe 6 will require the approval of all noteholders by extraordinary resolution, the High Court in the UK has ruled.
The decision is a serious setback to Cheyne Capital Management’s attempts to have the special servicer, Hatfield Philips, removed and replaced with Solutus Advisors.
The decision was watched closely by others in the securitisation market because it centred on the problem of getting the rating agency clearance (RACs) which are necessary to replace servicers without note downgrades, when Fitch Ratings no longer gives RACS.
DECO 15 – Pan Europe 6 was originally the 2007 securitisation of 10 loans totalling €1.45bn made by Deutsche Bank to borrowers of assets in Germany, Switzerland and Austria. As at March 2015, three loans totalling about €227m remain in the CMBS, all secured by properties in Germany.
Cheyne owns the most junior ranking class of notes and, as the controlling class, would normally have the right to replace the special servicer because it is most at risk in any default.
However, the transaction documents contained a clause that required the ratings agencies involved – Fitch, Moody’s and Standard & Poor’s – all give confirmation that any change of special servicer would not affect the notes’ ratings.
Moody’s generally stopped providing such confirmations in 2007, which was anticipated in the documents, but Fitch ceased in 2012 citing the replacement of a special servicer as an area where the interests of different classes of noteholders may not be aligned.
Cheyne argued the clause should be interpreted as requiring confirmation from those rating agencies that were willing in principle to give such confirmations.
Justice Arnold said in his judgement that the documentation provided an exception to the need to obtain confirmations where “each class of noteholders have approved the successor issuer servicer or successor issuer special servicer, as applicable, by extraordinary resolution”.
“It is common ground that this does not mean that confirmations do not have to be requested from the rating agencies, but only that a failure by one or more rating agencies to provide a confirmation can be overridden,” said Justice Arnold.
He ruled in favour of the claimant, the transaction trustee Deutsche Trustee Company, which had sought a determination on the interpretation of the clause.
In a briefing paper on the judgement, law firm Paul Hastings said: “The wording of the specific servicing agreement under which the replacement is to take place is crucial in determining the approach to be taken to RACs not being provided. Therefore, there is not one answer to this issue; the question needs to be considered afresh, each time based on a careful analysis of the wording of the specific servicing agreement.”
Paul Hastings partner, Stephen Parker, said: “It was a very good, very clear decision.” The law firm was not involved in the case but was involved in the Titan Europe 2007-1 CMBS dispute which also scrutinised the issue of replacing a special servicer.
“I think people are now building drop dead dates into the documents past which a confirmation from a rating agency that has not responded is no longer required,” said Parker.
“People are saying, ‘if a ratings agency doesn’t respond then let’s not hold things up waiting for a confirmation that will not come’. That’s one way of dealing with the issue.”
Cheyne, Deutsche Trustee and Hatfield Philips all declined to comment on the case.