Vol 5 (2008) - Issue 6

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UK Court Deals with US SIV Dispute: Bank of New York v Montana Board of Investments [2008] EWHC 1594 (Ch)

Recently in the High Court, Mr Justice Floyd was called on to make an urgent decision on whether the senior creditors of an insolvent structured investment vehicle (SIV) were entitled to give directions to the security trustee as to the time, manner and place of sale of the SIV’s assets. A SIV is a specialist fund that raises cash by issuing short term debt to investors and profits from the difference between the short term borrowing rate and the returns it makes on higher yielding longer term assets.

The case arose out of a dispute between the senior creditors who wanted the security trustee to sell the assets of the SIV quickly and another class of creditors who wanted to wait for the market to improve before any such assets were sold. The court examined the discretion afforded the security trustee in such circumstances.

The facts

Orion Finance Corporation (‘Orion’) was incorporated on 1 June 1995 under the laws of the Cayman Islands. The claimant bank (the ‘Security Trustee’) was appointed trustee by way of a security agreement dated 27 June 2006 (‘Security Agreement’). The first defendant was a holder of senior notes issued by Orion (‘Senior Creditors’). The second and third defendants were the only holders of senior subordinated notes issued by Orion (‘Senior Subordinated Creditors’).

The classes of debt security issued by Orion included senior notes, senior subordinated notes, and capital subordinated notes. Under the Security Agreement, the Senior Subordinated Creditors agreed their right to payment would be fully subordinated to the debts of the Senior Creditors. All of Orion’s assets (‘Collateral’) were charged to the Security Trustee for the benefit of Orion’s secured obligations.

The event

Due to concerns surrounding the US sub-prime mortgage market the valuation of SIV assets declined significantly in 2007 on a global basis.

A downgrade by Moody’s rating agency on 30 November 2007 of medium-term notes issued by Orion constituted an ‘Automatic Enforcement Event’ under the Security Agreement. Prior to the occurrence of an enforcement event, Orion had the right to arrange, purchase or dispose of the investment security and was responsible for making the decisions on the investments and dispositions of the Collateral. Upon the occurrence of this event the Security Trustee became entitled to enforce security in accordance with the provisions of the Security Agreement.

On 4 December 2007, the Security Trustee issued an enforcement notice and took exclusive control of the Collateral. Orion did not meet senior obligations due for payment on 14 January 2008 which constituted an ‘Insolvency Event’ which in turn triggered a ‘Mandatory Acceleration Event’ under the Security Agreement. This resulted in all Senior Notes becoming immediately due and payable.

The Security Trustee liaised with the Senior Creditors and the Senior Subordinated Creditors as to the preferred course to be taken in order to realise the Collateral. This process revealed that the Senior Creditors and the Senior Subordinated Creditors had differing views as to the duties of the Security Trustee and the timing within which the Collateral should be realised. The Senior Creditors wanted the Security Trustee to commence the liquidation of the Collateral immediately, whereas, the Senior Subordinated Creditors essentially wanted to wait for the market to improve before any assets were sold.