High Court backs Class A noteholders in £850m Gemini CMBS case

Proceeds from the sale of assets in the heavily defaulted £850m Gemini CMBS should be classified as principal and not interest, the High Court in London has ruled.

The decision means that under the deal’s documentation only the Class A noteholders are entitled to payments from asset sales. Had the court ruled sale proceeds as interest, then the junior noteholders, classes B to E, would also be eligible for payments.

The remaining 24 of the original 36 properties underlying the securitisation were recently sold, for circa £300m, to Varde Partners.

The decision brings to an end the long running saga of who receives what payments from the realisation of assets caught up in Gemini’s default. One of the parties representing junior noteholders confirmed that there are no plans to appeal.

In his draft judgement, Mr Justice Henderson said sale proceeds “should be characterised as principal, because they represent the realised capital value of a property which stands as security for the loan”.

“I accept the submissions of the Class A noteholders that the consequences of treating sale proceeds and surrender premiums as principal are well in line with what the parties might reasonably be expected to have contemplated when the securitisation was put in place and the notes were sold to investors,” he said.

By contrast, there would be “a lack of symmetry in the arrangements if the proceeds of sale and surrender premiums, representing as they do the underlying capital value of the security, were treated as revenue receipts and had to be used in full to pay interest on the notes.”

Gemini (Eclipse 2006-3) Plc was the securitisation of a £919m loan made by Barclays in 2006 to refinance a portfolio of 36 Propinvest Group properties in England, Wales and Scotland.

However, the value of the properties fell from £1.14bn in 2006 to £437m in 2009, and the failure to pay the full interest on the loan led to a default. Värde Partners bought the remaining 24 properties in the Gemini portfolio in August this year for around £300m.

The case to determine how proceeds were to be allocated from the sale of assets was brought in March 2014 by the deal’s special servicer, CBRE Loan Servicing, after it enforced the loan in August 2012.

One Class A noteholder, whose identity has not been disclosed, was party to the legal action, as was the issuer of the Glastonbury CRE CDO, represented by Palatium Investment Management, which acted for all the junior noteholders.

Justice Henderson said the junior noteholders’ main argument, heard in the High Court’s Chancery Division, was that the deal documents “failed to specify whether the relevant receipts are principal or interest… In the absence of any appropriation by either debtor or creditor, the common law rule or presumption is said to be that the receipts are to be applied as interest first”.

However, the common law rules on the appropriation of payments by a debtor to his creditor were not relevant in this case, which instead centered on how to “distinguish capital receipts from income receipts in the economy of a business”, said Justice Henderson.

He ruled in favour of the Class A noteholders and also said any surrender premiums are also to be classified as principal. He also reaffirmed that rent from the properties should be classified as interest and payable to all noteholders.

Paul Rivlin, co-chief executive of Palatium said: “I’m very glad that a decision has finally been reached. It’s just a pity that is has taken so long to get to this point.”