Duchess VI CLO class F holders entitled to reserve funds, court says

By Sarah Lizee

Olympia, Wash., April 11 – Duchess VI CLO BV said that the high court declared that the collateral manager is not entitled to an incentive collateral management fee upon an optional redemption of the €52.5 million class F secured income notes due 2022 and €1 million class J combination notes due 2022.

The class F noteholders are entitled to the reserved funds subject to deduction of (a) costs and expenses due as a matter of contract to the trustee, security trustee, issuer, collateral administrator, account bank, corporate administrator, custodian and registrar; and (b) costs and expense of the party which represented the class F noteholders in the proceedings.

The court gave the collateral manager permission to appeal the decision, with the deadline for filing an appeal set for April 18. The reserved funds will not be paid to the class F noteholders before the collateral manager's appeal rights have been exhausted.

As reported in April last year, Duchess had notified holders that a class F noteholder and the collateral manager have been unable to reach an agreement as to the interpretation of an incentive collateral management fee.

Prior to the Feb. 1, 2018 redemption of seven classes of notes due 2022, the collateral manager requested payment of an incentive collateral management fee under the priorities of payment.

After that, “a question arose as to the correct interpretation of the transaction documents in relation to how any incentive collateral management fee should be calculated under the enforcement proceeds priority of payments,” according to a notice.

The collateral manager requested a reserve of €12,124,252.73 as being due in respect to the collateral management fee. The reserve was placed in escrow pending final determination of the interpretation question.

Following the redemption, Duchess VI received further proceeds in relation to the liquidation of the portfolio of €14,196,335.26 and £1,524,846.15. The collateral manager requested that a portion of these funds be applied in payment of the incentive collateral management fee.

Accordingly, the funds were retained to be distributed in accordance with the enforcement proceeds priority of payments after the correct application of the reserve and further funds was determined.

All available funds other than the reserve and the further funds were distributed on the redemption date.

Following the redemption date, a class F noteholder contacted the trustee disputing the collateral manager's interpretation of the transaction documents in relation to how any incentive collateral management fee should be calculated.

As the class F noteholder and collateral manager were unable to agree on the interpretation, the trustee issued proceedings under part eight of the civil procedure rules to obtain a court decision on the question of interpretation.

Deutsche Trustee Co. Ltd. is the trustee.

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