Landesbank Hessen-Thuringen Girozentrale & Ors v Bayerische Landesbank, London Branch & Anor

In construing a payment waterfall in a syndicated finance agreement, a reference to the “Facility Agent” meant the bank acting in that contractual capacity, not the same corporate entity acting as Hedging Lender or Lender. The wording and structure of the agreement required its different capacities to be treated separately. Priority for the Facility Agent’s fees, expenses and costs therefore applied only to amounts incurred in its agency role. Hedging break costs incurred by the Hedging Lender, and sums payable to it under hedging agreements, were not entitled to that priority and fell within the pro rata distribution provisions.

The claim was brought under Part 8 concerning the construction of a £396 million facility agreement used to finance the purchase of 30 St Mary Axe, the Gherkin. The claimant banks and Bayerische Landesbank were Lenders. Bayerische Landesbank also acted as Facility Agent and Hedging Lender.

The dispute arose because the borrowers’ financial difficulties might lead to termination of interest rate swaps, producing substantial liabilities and a shortfall in recoveries. The central issue was whether “Facility Agent” in clause 9.7(a) included Bayerische Landesbank when acting as Hedging Lender, so that hedging break costs or hedging liabilities ranked ahead of sums due to the other Lenders.

1. Claim succeeded. The claimants’ construction of clause 9.7 was correct. In a shortfall, the Facility Agent had to apply recoveries to unpaid interest and principal due to the Lenders before sums due to the Hedging Lender under the Hedging Agreements or costs and expenses incurred by it under market hedging arrangements.
2. The agreement carefully distinguished Bayerische Landesbank’s capacities as Facility Agent, Security Agent, Lender and Hedging Lender. The reference to “Facility Agent” in clause 9.7(a) therefore meant Bayerische Landesbank acting as Facility Agent, rather than Bayerische Landesbank generally. Clause 16.6.2, which expressly distinguished the Facility Agent from the Hedging Lender, was particularly significant.
3. Clause 9.7(a) gave priority to fees, expenses and costs incurred by the Facility Agent in carrying out its agency role. That priority was commercially coherent because the Lenders had undertaken to indemnify the Facility Agent under clause 18.8.
4. Extending “Facility Agent” to include the Hedging Lender would create further difficulties. It would also suggest priority for Bayerische Landesbank’s fees and expenses as a Lender, contrary to clause 9.7(b) and the penultimate sentence of clause 9.7, which required the Lenders’ recoveries to be shared pro rata.
5. The different treatment in clause 16.6.2 did not support the defendants’ construction. That provision dealt with disbursements from rent accounts during the ordinary operation of the facility, whereas clause 9.7 dealt with shortfalls and prepayments under clause 8.9.
6. The parenthetical reference to break costs did not justify an extended construction. The Facility Agent might incur such liabilities when acting as agent but as contractual counterparty to a third party. Even if the words were surplusage, the court should not allow them to alter the clear meaning of the clause as a whole.