If you thought the wrangling over special servicer replacements was over following Richard Snowden QC’s judgment in US Bank v Titan Europe 2007-1 (NHP) plc in April last year, think again.

Ever since Fitch issued their press release confirming that as a matter of policy it would not provide rating agency confirmations (RACs) in relation to the replacement of special servicers on EMEA CMBS transactions (covered in our blog “What the Fitch??!”), we’ve seen a number of tussles as parties have sought to grapple with impact of Fitch’s policy change.

First, we had the three-part blockbuster ‘Windermere XIV saga’ Part 1, Part 2, Part 3 and then there was the ‘Clash of the Titan 2007-1’ trilogy Part 1Part 2Part 3, which many may have thought resolved the issue once and for all.

If you recall in US Bank v. Titan, Snowdon concluded that, on the facts of that particular case, Fitch’s policy not to issue RACs should not prevent an otherwise valid replacement attempt, so long as the other requirements for replacement were satisfied.  This gave us a straight-forward roadmap for other special servicer replacements in the wake of Fitch’s decision, right?!

…….Wrong.

Well, at least in relation to Deco 15 – Pan Europe 6.

Deco 15 – Pan Europe 6

In Deco 15 – Pan Europe 6, Cheyne Capital (Management) UK (LLP) was appointed Operating Adviser for the Controlling Class.  In an attempt to exercise its rights as Operating Adviser under the servicing agreement, Cheyne requested the Issuer and the Trustee to replace the existing special servicer (Hatfield Philips) with Solutus Advisors.

The provision for replacing the Issuer Special Servicer in the Deco 15 transaction provided that it was a pre-condition of the replacement that:

the Issuer Servicer or, as the case may be, Issuer Special Servicer will have notified each of the Rating Agencies in writing of the identity of the successor Issuer Servicer or successor Issuer Special Servicer and the Rating Agencies have confirmed to the Issuer Security Trustee and the Note Trustee that the appointment     of the successor Issuer Servicer or Issuer Special Servicer will not result in an Adverse Rating Event, unless each class of Noteholders have approved the successor Issuer Servicer or successor Issuer Special Servicer, as applicable, by Extraordinary Resolution.

An “Adverse Rating Event” means “with respect to any Rating Agency, an event that would cause the downgrade, qualification or withdrawal of the then current ratings by such Rating Agency of any class of Notes”.

Given Fitch’s refusal to provide RACs on special servicer replacements and the decision in US Bank v Titan, the Trustee decided to seek directions from the court as to the interpretation of this provision.

The issue the court had to consider was:

whether [the pre-conditions to replacing the special servicer in the servicing agreement] permits the replacement of the Issuer Special Servicer in in circumstances where a Rating Agency declines to say whether or not the appointment of the proposed successor Issuer Special Servicer would result in an Adverse Rating Event.  The issue arises because of the stance adopted by Fitch since 10 December 2012

Decision

Cheyne argued that Fitch’s refusal to provide RACs in respect of the replacement should not frustrate the replacement of a special servicer in this instance.  The Trustee advanced the alternative argument that the Rating Agencies must all have confirmed to the Trustee that the replacement of the Issuer Special Servicer will not result in an Adverse Rating Event, i.e. all Rating Agencies (including Fitch) must provide a rating agency confirmation, even where Fitch have a policy of not providing RACs.  The judge confirmed that the Trustee’s interpretation of the documents was the correct one.

In coming to his decision, the judge split the relevant replacement provision above into two limbs:

  1. termination of the appointment of the Issuer Servicer or Issuer Special Servicer cannot take effect unless “the Rating Agencies have confirmed to the Issuer Security Trustee and the Note Trustee that the appointment of the successor Issuer Servicer or Issuer Special Servicer will not result in an Adverse Rating Event”; and
  2. an exception to the need to obtain confirmations from the Rating Agencies where “each class of Noteholders have approved the successor Issuer Servicer or successor Issuer Special Servicer, as applicable by Extraordinary Resolution

It was decided that the interpretation of the Trustee corresponds with the natural meaning of the words in the first limb and that the second limb provides a partial answer to the problem which arises as a result of Fitch’s policy.

Unsurprisingly Cheyne relied on the US Bank v Titan decision for a number their arguments in the Deco application.  However, the judge ruled that there are material differences in the relevant replacement provisions and that therefore the reasoning in the Titan decision is not applicable to the current case.

Cheyne relies upon the decision of Mr Snowden with respect to a similar issue in US Bank v Titan as supporting its interpretation. The Trustee submits that the present case is distinguishable from US Bank v Titan because there are material differences in the relevant documents, and hence Mr Snowden’s reasoning is inapplicable. I agree with the Trustee on this point. Importantly, in that case, the clause corresponding to clause 26.4(b) did not include the second limb, and the clause corresponding to clause 29.13 did not differentiate between Moody’s and the other two Rating Agencies. There were also other less significant differences, such as the fact that the clause corresponding to clause 26.3 did not include the proviso. As I read Mr Snowden’s judgment at [99], his reasoning was driven by two key points: first, the wording of the clause corresponding to clause 29.13; and secondly the commercial absurdity of the contrary interpretation. Neither point applies here. Clause 29.13 is limited to Moody’s, and the argument on commercial absurdity is much less compelling due to the presence of the second limb in clause 26.4(b).

Given we’ve been following both these transactions very closely, we thought we’d give you a closer look at some of the main differences that were referred to in the Deco judgment: