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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Fondazione Enasarco v Lehman Brothers Finance SA & Anor [2015] EWHC 1307 (Ch) (12 May 2015) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2015/1307.html Cite as: [2015] EWHC 1307 (Ch) |
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CHANCERY DIVISION
Rolls Building London, EC4A 1NL |
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B e f o r e :
____________________
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Claimant |
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- and - |
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LEHMAN BROTHERS FINANCE S.A. ANTHRACITE RATED INVESTMENTS (CAYMAN) LIMITED |
Defendants |
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AND BETWEEN: |
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ANTHRACITE RATED INVESTMENTS (CAYMAN) LIMITED |
Part 20 Claimant |
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- and - |
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LEHMAN BROTHERS FINANCE S.A. |
Part 20 Defendant |
____________________
for the Claimant
Jonathan Nash QC and Sophie Mallinckrodt (instructed by Field Fisher Waterhouse LLP) for the Defendant/Part 20 Defendant
Jeremy Goldring QC and Henry Phillips (instructed by Clifford Chance LLP)
for the Defendant/Part 20 Claimant
Hearing dates: 27 and 28 November, 1, 2, 3 and 5 December 2014
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Crown Copyright ©
Mr Justice David Richards:
Introduction
The transactions
The Put Option
Loss: terms of the Master Agreement
"an amount will be payable equal to the Non-defaulting Party's Loss in respect of this Agreement. If that amount is a positive number, the Defaulting Party will pay it to the Non-defaulting Party; if it is a negative number, the Non-defaulting Party will pay the absolute value of that amount to the Defaulting Party."
" with respect to this Agreement or one or more Terminated Transactions, as the case may be, and a party, the Termination Currency Equivalent of an amount that party reasonably determines in good faith to be its total losses and costs (or gain, in which case expressed as a negative number) in connection with this Agreement or that Terminated Transaction or group of Terminated Transactions, as the case may be, including any loss of bargain, cost of funding or, at the election of such party but without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or re-establishing any hedge or related trading position (or any gain resulting from any of them)."
"A party will determine its Loss as of the relevant Early Termination Date, or, if that is not reasonably practicable, as of the earliest date thereafter as is reasonably practicable. A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets."
" with respect to one or more Terminated Transactions and a party making the determination, an amount determined on the basis of quotations from Reference Market Makers. Each quotation will be for an amount, if any, that would be paid to such party (expressed as a negative number) or by such party (expressed as a positive number) in consideration of an agreement between such party (taking into account any existing Credit Support Document with respect to the obligations of such party) and the quoting Reference Market-Maker to enter into a transaction (the "Replacement Transaction") that would have the effect of preserving for such party the economic equivalent of any payment or delivery (whether the underlying obligation was absolute or contingent and assuming the satisfaction of each applicable condition precedent) by the parties under Section 2(a)(i) in respect of such Terminated Transaction or group of Terminated Transactions that would, but for the occurrence of the relevant Early Termination Date, have been required after that date. The party making the determination (or its agent) will request each Reference Market-Maker to provide its quotation to the extent reasonably practicable as of the same day and time (without regard to different time zones) on or as soon as reasonably practicable after the relevant Early Termination Date. The day and time as of which those quotations are to be obtained will be selected in good faith by the party obliged to make a determination under Section 6(e), and, if each party is obliged, after consultation with the other. "
Events from 15 September 2008
The proceedings
i) payment from LBF of the sum of US $61,507,902 or such other sum as the court determines plus interest; and
ii) a declaration that no sums are payable by Enasarco to LBF.
i) declarations that no sums are payable by it to Enasarco or ARIC,
ii) a declaration that either US $41,781,881 or US $42,059,565 (depending on the calculation of the accrued unpaid premium) plus interest is payable by ARIC to it,
iii) an order for payment of that sum,
Evidence
The principal issues
"A party may (but need not) determine its Loss by reference to quotations of relevant rates or prices from one or more leading dealers in the relevant markets."
i) 6 May 2009 was not the earliest reasonably practicable date after the ETD as of which ARIC could have determined its Loss on the basis of a quotation for a replacement transaction;
ii) in any event, the terms of the CS Option were so different from those of the Put Option that the price of the CS Option could not be used to determine ARIC's loss of bargain; and
iii) further, in any event, the date of the calculation statement, 16 September 2009, was not "as soon as reasonably practicable following the occurrence" of the ETD, as required by Section 6(d) of the Master Agreement.
The earliest practicable date for a replacement transaction
Enasarco's search for a replacement transaction
"pursue a strategy that was aimed at preserving the value of the investment; to identify partners (preferably several) amongst financial institutions, which were proven sound and in a position to restructure the debt and take over the position of [LBF] as the provider of the Protection."
This is a quotation from Enasarco's annual report for 2008, which LBF sets out in its defence.
"We are currently discussing with our advisors possible restructuring alternatives for our investment which do not contemplate the immediate realisation of the Underlying Assets "
"faced with a negotiation phase with the Trustee of Anthracite R26, to define the best way to move from the Guarantee provided by Lehman Brothers to another guarantee, to be applied also to several financial instruments deriving from the original one or provided by different entities."
"The change of entity and in the number of entities, if applicable, that will guarantee the note or the notes might, in theory, determine a change also in the current underlyings which, incidentally, had already been undergoing substantial changes and were under constant review to improve their risk/return profile."
"The strategy that the Foundation has shared with its advisor Professor Pace and the above mentioned Banks, to restructure the investment and re-establish a guarantee on the principal, consists of two different phases:
(1) The immediate transfer of ownership of the Anthracite Note to only one of the Banks involved, so that it can terminate any existing contractual relations maintained by Anthracite with the counter-parties of the Lehman Group and with third parties it would be an exchange of the Anthracite Notes with other securities, in a technical form that allows said swap to be carried out based on the same nominal value (780 million) and without giving rise to any financial effects, as the new securities would have a return fully linked to that of the current bond.
(2) In the second phase, when the actual restructuring of the investment takes place, once the contractual relations are terminated and the obligations with Lehman are settled and, after receiving the offers, Anthracite's assets are transferred to the vehicles of the new protected-bonds. In this phase the bond may be "chopped up" among the different Banks, so as to achieve a greater guarantee diversification."
"Based on the above considerations, this process may be regarded as capable of expediting the restructuring for the Foundation without any material risk."
"The contacted Banks have been asked to prepare proposals to re-establish a guarantee on the capital in a short period of time and possibly also for the initial phase. Obviously, these proposals shall be incorporated and, where necessary, improved in the subsequent phase, when the bond will be finally restructured
All the Banks contacted have confirmed their willingness to issue the guarantee, reserving the right to disclose the relevant terms and conditions at a later time after the completion of the due diligence regarding the assets underlying the current bond."
"Furthermore after the implementation of the Proposed Replacement Structure, the bank shall consider providing Protection in relation to certain assets that are currently held within the Balanced Company "
"As discussed during yesterday's meeting at our office, we confirm that we are able to guarantee 100% of the capital of maturity, provided that the Anthracite Note's NAV is equal to or greater than the current value of 100% of the nominal value of the Anthracite Note on the maturity date. The calculation of the current value will be made at a rate equal to Euribor flat, reflecting the high credit standing of Credit Suisse in the current market conditions."
"This letter is submitted on the basis that it does not give rise to any commitment to issue or purchase any securities, derivatives or guarantees and does not impose any obligation on any party. The transactions are subject to continuing discussions, development and agreement by and between ourselves and yourselves and to further consideration by our legal, credit, tax, risk and regulatory compliance departments."
"Issue of a new CPPI by CSi linked to the Fund where the funds of hedge fund shares have been transferred to".
It also included a closing out of the existing structure, including the winding-up of Balco. In fact, ultimately Balco was not wound up and the assets remained within it.
"the Anthracite R26 Note held by the Enasarco Foundation is at a more advanced stage in the restructuring process than all the Anthracite Notes held by institutional investors."
"The best-case scenario is that the first phase will terminate at the end of January 2009 at the earliest, but it is much more realistic to expect that at least the whole of February will pass before its conclusion."
"the actual restructuring of the investment, for which, on the instructions of the Board, it is intended to appoint more than one Bank, selected through a beauty contest in order to diversify the provision of guarantees."
"It was subject to a condition that the assets under BalCo had to be first unwound during a "portfolio re-profiling phase" and that the proceeds from such redemptions had to be above the value of an HSBC zero-coupon (or an Italian government bond, at Enasarco's discretion), with a maturity not beyond 2034. HSBC expected this re-profiling phase not to last beyond December 2010. In the event redemption proceeds did not exceed the value of the agreed zero-coupon curve, the structure would simply be unwound without any protection provided by HSBC. If the re-profiling succeeded, the new underlying assets would be required to be very liquid: most of the funds were required to have weekly liquidity; the worst redemption frequency would have to be monthly."
The price offered by SG "had some commercially favourable aspects, but it was difficult to compare it to other prices because the structure was not a standard CPPI." CS proposed providing capital protection with Balco's shares remaining as the underlying asset. Balco's assets would be managed in accordance with a revised, more conservative investment allocation mechanism. CS took a conservative view of the performance of the underlying portfolio and therefore required Enasarco to sell a credit default swap to CS for a significant fee which would be transferred to Balco's assets in order to increase its net asset value.
"I appreciate that, due to the number of Lehman Brothers affiliated entities involved, a transaction such as the Series 26 Notes may have taken a long time to unwind and restructure into a new bond."
"159. In calculating the replacement cost for the Transaction, I believe that one cannot look at the principal transaction on a standalone basis; instead, one should look at all the key components of the bonds that enable the protection of capital at maturity. These components are the principal protection transaction, the Swap Units and the Calculation Agent's allocation of the BalCo's assets in line with the Investment Allocation Mechanism and other transactional documents.
160. For a fund derivatives practitioner, it is not realistic to price the principal protection transaction by itself without assuming that the Principal Protection Provider would also be Calculation Agent and Swap Counterparty, or at least assuming that they are related entities."
The state of the funds derivatives market after 15 September 2008
"361. In this Section, I review a number of fund derivatives transactions that traded on or around the ETD, which I have observed. I also explain how the fund derivatives market evolved following the ETD.
362. Some of the information I provide in this Section is based on interviews that I conducted with 23 different professionals who were directly involved in the fund derivatives market during the period around and following the ETD.
363. Through these interviews, I wanted to gather a more comprehensive view of the market, including the experiences of traders, structures and salespeople at other banks, in order to complement my own personal experience of working in the fund derivatives market during that time.
364. The time period covered was from July 2008 to December 2008. I find that there were at least eleven different fund derivatives transactions that traded during this period.
365. I find evidence that, despite the bankruptcy of Lehman Brothers on 15 September 2008, the fund derivatives market was active and functional during that month and the following months. This is shown in the number of transactions which occurred in that period."
"Talked to few guys at different c-parties [counter-parties], and feedbacks so far are pretty much in line with each other. All of them (CS, Unicredit, waiting from Citi) are showing levels on a pure indication-valuation basis, confirming they will not trade now."
"A. Markit had a service called Totem and Totem was something that enabled investment banks to mark their books for OTC transactions, which were not observable on the screen in the market. So typically it was a risk management department at a bank who would feed information to Markit and Markit would aggregate the information across all the banks and then give back an average figure.
So it was a standardised transaction, for a particular standardised transaction. Totem would poll the banks; each bank would give its number. The average number came back to the banks and that allowed the Markit risk departments to say their particular book was marked at market levels below or above, basically; give them an indication.
Q. I see. So the essence of what Markit does is to provide an average of bids? Is that a fair way of putting it?
A. An average of valuations.
Q. An average of valuations; thank you.
A. Fair values."
Different terms
The date of calculation statement
Conclusion