Credit Suisse fund loses multi-million euro Class X claim

The Class X noteholder in four distressed Titan Europe CMBS deals has lost its High Court action to recover millions of pounds of additional interest.

Yesterday the Chancellor of the High Court, Sir Terence Etherton, rejected a claim by Credit Suisse Asset Management (CSAM) that default interest should be included in the payments due to the Class X notes.

In a succinct, 12-page judgement, the Chancellor said: “In my judgement, no account should be taken of additional interest following a default under the loans.”

Citing eight reasons for his decision, the Chancellor said it therefore followed that other issues raised in CSAM’s claim, principally at what rate should interest be paid on unpaid interest in the Class X notes and whether Class X notes remain outstanding until all other notes have been redeemed, were no longer relevant.

He said the argument that Class Xs should remain outstanding until all other notes had been redeemed “was extraordinary and highly unlikely to have been intended.”

For convenience, the parties made submissions only referencing one of the four deals, Titan 20016-1. The proceedings were set against a background of extensive default on this deals’ loans, with €20 million of default interest having accrued since 2011, of which only €3,000 has been paid.

Analysts estimate that the interest calculation issues in that one deal was worth €33.7 million, had CSAM won.

The Chancellor’s decision comes straight after another High Court rejection of claims of underpayment on the Class X notes, this time made by Hayfin Opal Luxco, which acquired the notes in the Windermere VII CMBS from a Lehman company. The judge in that case was Mr Justice Snowden.

Chris Webber, a partner at law firm Squire Patton Boggs, said that although both judges came to the same conclusion, they took different approaches.

“The Titan judgement is notable for a more commercially focused approach to the issues, whereas the Windermere decision is grounded in a close textual analysis of the structure and in particular the cash flows into the transaction account.”

Webber said Class X notes “became a lightning rod for investors’ ire” after the collapse of commercial property values in the global financial crisis. The notes were intended as a means of returning the excess spread, or surplus in cash flows received on the underling loans above the CMBS’s liabilities, to the originating bank – Credit Suisse in the Titan cases.

“Issues have arisen because documents define the excess spread in terms of the interest due on the underlying loans, rather than the interest actually received”, Webber explained. ‘In a non-performing deal, that could entail the liquidity facility in the CMBS being drawn to pay a theoretical excess spread that doesn’t exist in the real world.” Furthermore, because the interest rate gears up to enormous levels, and the Class X normally ranked ahead of all other notes, they got windfalls as other note classes often got nothing.

The four Titan deals were: Titan Europe 2006-1, Titan Europe 2006-2, Cornerstone Titan 2007-1 and Titan Europe 2007-2. The actions were defended by the issuers, the note trustee, the agent bank and one of the B noteholders in Titan 2006-1.

The principal amount of Titan 2006-1 was originally €723.3 million with £50,000 of that relating to the X Notes.

In the Titan judgement, the Chancellor also specifically said that he had decided not to make so-called ‘obiter’ comments on the issues that were rendered irrelevant by his judgement on the central default interest point. He also decided not to give undue consideration to the Windermere VII case.

He said while some might feel this would have been helpful in the event of CSAM appealing, he did not want his views “deployed in an argument in future cases where, almost inevitably, the wording of the relevant instruments and the surrounding matrix of fact will not be identical.”