Key point

The English courts will interpret contracts by examining the meaning of the words but also the commercial effect within the wider context of the arrangement. 


An issuer in a CLO structure issued several classes of notes secured on an underlying portfolio of loan receivables. The documents provided that certain proceeds of the underlying loans should be reinvested if "the ratings of the Class A1 Notes have not been downgraded below their Initial Ratings". If the reinvestment criteria were not met, the proceeds should be used to redeem notes in accordance with the agreed priority. The A1 Notes were downgraded in 2010 but were upgraded back their original rating in 2012. The senior note holders argued that wording of the ratings trigger was clear and unambiguous and that the past downgrade could never be cured. The High Court agreed, and the junior note holders appealed.


The Court of Appeal concluded that the trigger phrase was not clear and could also mean the A1 Notes "are not presently downgraded (even though they may have been in the past)". The Court decided that an iterative approach should be taken to test each different interpretation against the commercial consequences. Using that approach, the Court of Appeal decided for the junior note holders. 


After such a clear first instance decision it is somewhat remarkable that the junior noteholders won on appeal. The case shows that if it is intended such a trigger should not be capable of cure it is best to set that out in the document.

Napier Park European Credit Opportunities Fund Limited v Harbourmaster Pro-Rata CLO 2 BV and others