28 May 2015
The end of the Tael: debt trades and accrued rights under the Loan Market Association standard terms
Where a seller of debt wishes to have a right to receive fees or interest in connection with a traded portion of debt after settlement, the LMA standard terms should be amended to contemplate such a right.
If fees and interest are received after settlement of a debt trade, can the seller recover them under the Loan Market Association (LMA) Standard Terms and Conditions for Par and Distressed Trade Transactions (LMA Terms)? Three years after the trial judge found in favour of the seller, the UK Supreme Court has reversed that decision and found in favour of the buyer (Tael One Partners Limited v Morgan Stanley & Co International PLC  UKSC 12).
The facts – a refresher
Tael was an original lender under a syndicated loan. Under the loan, the borrower was liable to pay a normal floating rate of interest and a "payment premium" if the loan was prepaid or repaid in full. The payment premium was an additional amount payable to the lender so as to increase the aggregate internal rate of return to an amount between 17% and 20% p.a. (depending on the occurrence of certain events).
On 14 January 2010, Tael traded part of its debt to Morgan Stanley pursuant to a Trade Confirmation that incorporated the LMA Terms. The purchase price letter did not specifically mention the payment premium.
Following the borrower repaying the principal and the applicable payment premium to Morgan Stanley, Tael sought a portion of the payment premium that related to the pre-trade period from Morgan Stanley. Morgan Stanley refused to pay Tael a portion of the premium.
The two key conditions of the Loan Market Association Standard Terms and Conditions
As the purchase price letter did not specifically address the payment premium, the issue was whether the LMA Terms required Morgan Stanley to pass through part of the payment premium (insofar as it related to the pre-settlement date period) to Tael.
Under the January 2009 version of the Standard Terms, a buyer was liable to the seller for:
- any interest or fees accrued up to (but not including) the settlement date (condition 11.3(a)); and
- interest or fees that accrue by reference to the lapse of time, to the extent they accrued in respect of a period prior to the settlement date (condition 11.9(a)).
Tael wins – then loses
At first instance, the High Court found that Tael was entitled to a portion of the payment premium that accrued in respect of the pre-settlement date period. Justice Popplewell found that the payment premium had a similar function to interest although on a deferred basis. Although the right to payment accrued following settlement, a portion of the premium accrued in respect of the period prior to settlement.
This decision was reversed on appeal, the Court of Appeal finding that Condition 11.9(a) did not create any additional entitlement beyond what is said to be payable in Condition 11.3(a). The Court reached this conclusion because other conditions in the LMA Terms included wording specific to payment. This is in contrast to Condition 11.9(a) which only refers to amounts being "for the account of" a party without including any obligation to pay such amounts to the seller or to notify the seller of its receipt of such amount..
Supreme Court: An event, not time, the trigger for the payment premium
Although the Supreme Court found Tael was not entitled to the payment premium, its reasoning differed from the Court of Appeal.
Unlike the lower courts, it held that the payment premium did not "accrue by reference to the lapse of time", a necessary element of Condition 11.9(a). To "accrue" was held to mean "the coming into being of a right or an obligation". The payment premium did not come into being because of the lapse of time but because of a defined event, namely the prepayment or repayment of the loan.
This interpretation was reinforced by the commercial context of a market in which loans are traded. It was unlikely that the LMA Terms were intended to create continuing rights and obligations between the parties in respect of payment over a substantial period of time, given that loans can be traded multiple times by multiple parties.
LMA Terms might not capture your intentions
Although this English case is not strictly binding on Australian courts, it is likely to be persuasive when an Australian court is required to interpret the Standard Terms.
Parties to a debt trade need to evaluate if the Standard Terms (as relevant) properly capture their intentions in light of the specific terms of the underlying loan agreement. In particular, if the loan agreement contains fee and interest provisions that aren't typical, amendments should be made to the LMA Terms to properly account for those amounts or the amounts should be reflected in the pricing of the trade.
While not binding authority, the Supreme Court did note that Condition 11.9(a) does not confer a further right to payment. Interestingly, the LMA has responded to this by noting on its website that it intends to clarify the wording of Condition 15.9 (previously Condition 11.9) so that it operates as a sweeper provision and requires the parties to account for interest and fees that aren’t otherwise captured in the other provisions in Condition 15.
As at the date of this article, the LMA Terms have not be amended to reflect this.
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