Credit Suisse Asset Management LLC v Titan Europe 2006-1 Plc & Ors

In interpreting complex securitisation documents, the court must read the relevant language in its documentary, factual and commercial context, considering the instrument as a whole and its commercial scheme. The natural meaning of the words remains important, but an over-literal reading of one provision must not distort or frustrate that scheme.

A bespoke formula for Class X interest did not include default interest payable under the underlying loans where the transaction documents, offering materials and commercial structure pointed to the stated contractual rates. Mandatory redemption provisions required the Class X Notes to be redeemed at maturity. After maturity, unpaid senior notes were treated as bearing interest at the applicable judgment-debt rate when calculating the Class X rate.

Credit Suisse Asset Management LLC, as investment manager for a fund holding Class X Notes, brought four sets of proceedings concerning materially identical commercial mortgage-backed securitisation structures. The defendants included the relevant issuers, note trustee, agent bank and, in one action, a Class B noteholder.

The proceedings concerned four common questions: whether default interest under the underlying loans formed part of the Class X Interest Rate calculation; the rate payable on unpaid Class X interest; whether the Class X Notes had to be redeemed at maturity or could remain outstanding while other notes remained unpaid; and how the Class X rate should be calculated if those notes remained outstanding.

1. Issue 1. The Class X Interest Rate was to be calculated without taking account of additional interest arising from defaults under the underlying Loans. Although default interest was legally interest, the relevant wording, the Offering Circular, the absence of investor access to the loan documents, the simpler defined-rate formulas, the transaction’s commercial structure and the complexity of applying different default regimes all indicated that the parties intended to use the stated annual loan rates. Including default interest would give the Originator a greater share of income when the Loans performed worse, without bearing corresponding recovery costs.
2. Issue 2. The question of interest on unpaid Class X interest did not arise following the decision on Issue 1. The court declined to express obiter views because they might be deployed in later cases involving differently worded instruments and factual matrices.
3. Issue 3. The Class X Notes had to be redeemed immediately at their Maturity Date. Condition 6(a) was mandatory, and the €5,000 outstanding principal was held in a separate account charged with repayment. Condition 6(b) concerned the period before maturity. The subordination provision in Condition 16 prevented noteholders from demanding repayment but did not displace the issuer’s mandatory redemption obligation. Service of a Note Enforcement Notice produced the same result under clause 7.5 of the Deed of Charge and Assignment.
4. Issue 4. For the purpose of calculating the Class X Interest Rate after the Class A-H Notes’ maturity dates, unpaid principal on those Notes was treated as bearing interest at 8 per cent per annum, being the English judgment-debt rate identified in clause 2.2(b) of the Trust Deed. Reading that clause with Condition 5 avoided an artificial calculation based only on the lower contractual rates.