Traders should be aware that where fees and interest accrue after a trade, a portion of that amount may be recoverable by the seller.
The High Court of England and Wales recently determined that certain fees accruing after the settlement date of a debt trade may be payable to the seller (Tael One Partners Ltd v Morgan Stanley & Co International Plc  EWHC 1858 (Comm)).
Tael was an original lender under a syndicated credit agreement. The borrower was liable for interest of 11.25% p.a., as well as a "payment premium" payable at the time of principal repayment. The payment premium was an additional amount payable to the lender (or transferee) so as to increase the aggregate internal rate of return to an amount between 17% and 20% p.a. (depending on the occurrence of certain events).
On 14 January 2010 Tael transferred US$11 million of debt to Morgan Stanley.
The trade was completed pursuant to the then standard form Loan Market Association Standard Terms and Conditions for Par Trade Transactions. The current version of the Standard Terms contain equivalent provisions to those that applied to the Tael trade and are widely used in Australia as the base documents upon which par and distressed debt is traded.
On 16 December 2010, the borrower repaid the principal to Morgan Stanley together with interest and the applicable payment premium. Tael sought a portion of the payment premium that related to the period prior to the trade to Morgan Stanley. Morgan Stanley refused to pay it (hence the proceedings).
The January 2009 version of the Standard Terms provided that a buyer was liable to the seller for:
- any interest or fees accrued up to (but not including) the settlement date (condition 11.3(a)); and
- interest or fees that accrue after the settlement date, but that relate to a period prior to the settlement date (condition 11.9(a)).
While the payment premium accrued after the date of settlement, some of the payment accrued in respect of the period prior to the settlement date as it was calculated on a per annum basis. Accordingly, the Court held that Morgan Stanley was required to pay Tael that portion of the payment premium that accrued in respect of the pre-settlement date period.
What does this decision mean for debt trades?
Traders should be aware that where fees and interest accrue after a trade, a portion of that amount may be recoverable by the seller. In executing a trade parties should turn their mind to any applicable fees or interest charges that may accrue upon a particular event occurring, and consider whether that accrual occurs in respect of the pre-settlement period. Treatment of any such amounts should be reflected in pricing or be appropriately dealt with by way of amendment to the Standard Terms.
Note that while this English case is not strictly binding on Australian courts, it is likely to be persuasive in circumstances where an Australian court is required to interpret the Standard Terms.