The Court of Appeal reversed the judgment of the High Court on the interpretation of a ratings requirement set out in the reinvestment criteria of a collateralised loan obligation (“CLO”) structure.


The case concerned whether certain funds arising on the CLO transaction during a specific period (the “Relevant Period”) should be reinvested or be used to repay the senior noteholders in accordance with the waterfall.

The basic principle set out in the transaction documents was that such funds should be reinvested if they met specified reinvestment criteria, one of which was that “the ratings of the Class A1 notes (the “Senior Notes”) have not been downgraded below their initial rating” (the “Ratings Requirement”).

When the CLO transaction closed in 2006, the Senior Notes were rated AAA. Prior to the Relevant Period, Standard and Poor’s Rating Group (“S&P”) downgraded the Senior Notes to a rating of AA but then subsequently upgraded them back to an AAA rating. The senior noteholders contended that such downgrade meant that the Ratings Requirement could never be satisfied and, as a result, the funds should be used to repay them in accordance with the waterfall. The junior noteholders disagreed.

The High Court agreed with the senior noteholders that the Ratings Requirement could not be satisfied if the Senior Notes had been downgraded below the initial ratings at any time. The junior noteholders appealed.


The Court of Appeal allowed the appeal.

The rules of contractual interpretation required the court to do more than textual analysis and comparison. They extended to placing the rival interpretations of the Ratings Requirement within their commercial setting and investigating (or evaluating) their commercial consequences. The court had to discern the commercial intention and the commercial consequences from the terms of the contract in order to determine whether a word or phrase is clear and unambiguous. It was necessary to test any interpretation against the commercial consequences.

In this case, there was more than one possible interpretation of the Ratings Requirement and so the court was required to look at the rival interpretations in relation to the overall structure of the CLO transaction and test them against the commercial consequences.

The Court of Appeal found that the senior noteholders’ interpretation raised the effect of a historic downgrade of the Senior Notes to a level of pre-dominance which it was not designed to have in a context where, if given that level of pre-dominance, it conflicted with the basic scheme of the CLO.

The funds would, therefore, be reinvested rather than used to repay the Senior Notes.

BLP comment:

“This case is a further illustration of the way in which courts will consider the commercial consequences of financial contracts and of the need for clarity when drafting complex provisions.”