Vol 4 (2007) - Issue 5

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Citibank NA v (1) MBIA Assurance SA (2) QVT Financial LP (3) Fixed-Link Finance BV [2006] EWHC 3215 (Ch) [2007] EWCA Civ 11

Introduction

Securitisation as a form of finance has grown from relatively modest beginnings in the mid-1970s in the US to assume proportions of global significance today. Its importance to the world economy simply cannot be exaggerated. Yet – and this is a remarkable fact – most of the features which are typical of securitisations have never been subjected to judicial scrutiny, in any jurisdiction anywhere in the world. Accordingly any judicial decision concerning a securitisation is an important and noteworthy event. But to have two such decisions – at first instance and on appeal – both in the space of a few weeks, and in London to boot, is nothing less than spectacular. In November 2006 Citibank, which had participated in 2001 in the securitisation of part of Eurotunnel’s awesome debts, began proceedings in the Chancery Division of the High Court in London seeking the determination of certain questions which had arisen because of proposals for the restructuring of those debts that were then shortly to be considered by the Paris Commercial Court. Mr Justice Mann ruled on those questions within 4 weeks, and the Court of Appeal (comprising Sir Anthony Clark MR, Lady Justice Arden and Lord Justice Dyson) ruled on them within a further 5 weeks. There was particular need for such dizzying urgency – but let no one say that litigation in London is slow. At the heart of the case was a sustained assault, mounted by a hedge fund noteholder, on the power of a monoline insurer to direct how Citi should exercise its powers and duties as trustee. Had the assault succeeded, the implications for many similar securitisations would have been significant indeed. As it is, the assault failed. The case contains lessons not just for securitisation lawyers, but for trust lawyers and real estate lawyers too. We endeavour to explain them.

The facts

Eurotunnel comprises an Anglo-French group of companies which operate the Channel Tunnel between the UK and France. It has been struggling notoriously for years with spectacular debts which it cannot properly service from its revenues. It has undergone various restructurings.

In 2001 part of Eurotunnel’s debt – tier 3 junior debt amounting to GBP506m and EUR918m – was made the subject of a securitisation, in the following way (we simplify the facts a little). The debt was acquired by a Dutch special purpose vehicle, Fixed-Link Finance BV (‘FLF’), which then charged the debt to Citi by means of a deed of charge. To fund its acquisition of the debt, FLF issued 7 tranches of securities to investors, in the form of notes. The top 2 tranches of notes were enhanced by guarantees from a monoline insurer, MBIA Assurance SA (‘MBIA’). A hedge fund, QVT Financial LP (‘QVT’), acquired some of the bottom tranche of notes. The notes were all due in 2025 and were listed on a European exchange. Simultaneously with the deed of charge, FLF, Citi and MBIA also entered into a trust deed, whereby FLF covenanted with Citi to pay the sums due under the notes and to comply with the conditions of the notes, the terms of the trust deed, and the terms of the deed of charge. The trust deed also provided that Citi would hold the benefit of these covenants, and the debt charged by the deed of charge, on trust for the noteholders.

MBIA was given Note Controlling Party (‘NCP’) status by the trust deed. That meant that, for so long as it was liable under its guarantee in respect of the top 2 tranches of notes, MBIA had extensive powers to direct Citi as to how it should act as trustee. The conditions of the notes, the deed of charge, and the trust deed were all governed by English law.

So far so good. But Eurotunnel’s difficulties persisted. In February 2006 the group’s French auditors gave warning of financial problems and proposals then emerged for the restructuring of its debts. Among them (again simplifying the facts a little) was a proposal that the tier 3 junior debt should be replaced by hybrid notes (specifically notes redeemable as shares), with an option for cash in lieu. MBIA intended to direct Citi to get FLF to take the cash, whereas QVT strongly preferred FLF to take the hybrid notes. The proposals foundered, for a variety of reasons of which this, it seems, was only one. In August 2006 some of the companies in the Eurotunnel group, including those liable in respect of the tier 3 junior debt, went into sauvegarde’, a very new French form of judicial administration.