(This article was first published on Lexis®PSL Banking & Finance. Click for a free trial of Lexis®PSL)
What was the appeal about?
Credit Suisse Asset Management (“CSAM”) was the originator of Titan 2006-1, a commercial mortgage backed securitization (“CMBS”). The Titan 2006-1 SPV (“Titan”) issued eight tranches of bonds (A to H) for a total of EUR 723 million. It used the proceeds to acquire commercial real estate loans from CSAM.
Like many CMBS structures of that vintage, the Titan CMBS featured “Class X notes”. These were a small (EUR 50,000) tranche of bonds that ranked ahead of the other tranches in certain respects and bore a special variable rate of interest. Their purpose was to ensure that if Titan was due to receive more in interest from the loans than it owed to the tranche A to H bondholders, that “excess spread” would be paid to the Class X noteholder (which was CSAM). In other words, the Class X notes allowed CSAM to extract any surplus interest from the loans it had securitized, rather than leave it trapped in Titan.
Because the excess spread was generated across hundreds of millions of euros of loans and bonds but paid as interest on only EUR 50,000 of Class X notes, the Class X interest rate could be thousands of percent and tens of millions of euros.
The loans Titan had acquired suffered significant defaults. Titan became unable to pay the interest due on the bonds it had issued. However, interest was still due on the Class X note, because the transaction documents defined the Class X interest rate by reference to sums due to Titan on the loans, rather than sums actually received.
Disputes arose between CSAM and some class A to H noteholders about various aspects of how the Class X interest rate should be calculated, and when the Class X notes should be redeemed. These issues were decided by Mr Justice Etherton in the High Court earlier in 2016. When the case reached the Court of Appeal, only one issue remained: whether, when calculating the Class X interest rate, the fact that default interest was due on some of Titan’s loans should be taken into account. Continue Reading