In a significant ruling that clarifies the position on sub-participation arrangements, the Court of Appeal in the case of Yieldpoint Stable Value Fund, LP v Kimura Commodity Trade Finance Fund Ltd [2024] EWCA Civ 639 has overturned the Commercial Court’s decision of May 2023, which held that a participant’s interest in a loan facility was effectively a fixed term loan.

The term “sub-participation” is not a legal term but is commonly used in the financial markets to signify a transaction where a lender (the "Grantor") transfers a part or all of the debtor risk in a loan or other financial instrument to another party, the "Participant".

In the first instance, the Commercial Court decided that the inclusion of a "Maturity Date of the Participation" provision in the Participation Agreement (as defined below) altered the sub-participation structure to a structure akin to a fixed term loan and held that Yieldpoint, as the Participant, was entitled to the principal investment sum of USD 5 million from Kimura, notwithstanding the default by the underlying borrower under the underlying loan from Kimura.

However, the Court of Appeal agreed with Kimura’s contention that interpreting the agreement as a fixed term loan was not viable commercially. Such interpretation would effectively allow Yieldpoint to profit from all of its interest entitlement and all of its price participation with respect to the USD 5 million without Yieldpoint bearing any risk. 

Background

• In 2021, Yieldpoint agreed to pay USD 5 million to Kimura to participate in Kimura’s 50% share of an existing pre-export commodity financing agreement with the Chilean copper mining company Minera Tre Valles SPA ("MTV") whereby Kimura and Anglo American Marketing Limited each lent USD 22.5 million to MTV.
• The agreement between Kimura and Yieldpoint was documented through a participation agreement (the “Participation Agreement”) primarily made pursuant to and expressly incorporating the terms of the Master Participation Agreement for Trade Transactions based on the Bankers Association for Finance and Trade template (the “BAFT MPA”), an industry standard agreement used for risk sharing in trade finance transactions, and which operates as a master agreement. Once the BAFT MPA is entered into between two parties, individual transactions between those parties (and/or their affiliates) are concluded using the forms of Offer and Acceptance set out in the appendices thereto. 
• The borrower subsequently failed to repay the loan and Yieldpoint commenced proceedings against Kimura, claiming repayment of the USD 5 million paid by it to Kimura together with unpaid interest and monthly price participations, which Kimura refused to pay.
• Yieldpoint claimed that, upon correct interpretation, the Participation Agreement was a fixed-term loan, which was to be repaid in full by the "Maturity Date of the Participation" set to 31 March 2022, regardless of any prior defaults by the borrower. In contrast, Kimura argued that the Participation Agreement amounted to a sub-participation in the facility, indicating that Yieldpoint would share in both the risk and the reward of the underlying loan to the borrower.
• In May 2023, the High Court judge held “not without some discomfort” that the Participation Agreement was a fixed term loan and not a true sub-participation in the facility and ordered Kimura to make the claimed amount to Yieldpoint. Kimura appealed the decision.

Court of Appeal

In allowing the appeal by Kimura, the Court of Appeal took the view that the Participation Agreement was a conventional sub-participation and, considering that MTV had defaulted on repayment of its loan to Kimura, Yieldpoint was not entitled to be repaid its USD 5 million investment. 

Key takeaway

In the case discussed, the use of “Maturity Date of the Participation” was not read as to overturn the entire structure and effect of the umbrella BAFT MPA. It is nevertheless recommended that parties remain careful when modifying the terms of arrangements entered into under standard market documents and templates, so as to avoid adverse consequences that could potentially undermine the intended nature of the transaction. This care should extend to completing schedules for each particular transaction, as well as the master agreement itself.