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The Court of Appeal has reversed a decision regarding an offer under a Bankers Association for Finance and Trade (BAFT) Master Risk Participation Agreement (MRPA), in a case between Kimura Commodity Trade Finance Fund Limited and Yieldpoint Stable Value Fund, LP.

Explaining the BAFT MRPA

The BAFT MRPA – the most recent version of which was released in 2018 with a few updates since – has been regarded as a market standard document by which holders of trade assets such as loans, receivables and contingent payments (e.g. letters of credit) can act as sellers of participations in the risk in those assets to a counterparty, the participant.

The sale can either be funded, where the seller receives payment upfront from the participant, or unfunded, where the participant only pays if there is a default.

The purpose of such an arrangement is to transfer the credit risk of default in the underlying transaction from seller to participant. The seller sells ‘without recourse’ to itself and leaves the participant to take the risk of non-payment in the underlying transaction by obtaining recourse against the obligor in that transaction – the recourse party.

The parties enter into the BAFT MRPA which, as its description implies, is a master agreement so either party can be a seller or participant in a specific transaction. The mechanism is to document the participation by an Offer under which the seller offers to sell and the participant agrees to purchase a participation. So far so good?

The current case

In this case, Kimura was the seller and Yieldpoint was the participant. The parties had a BAFT MRPA and the specific transaction was documented by way of an Offer and Acceptance – and this is where the problem emerged.

The parties appear to have discussed the fact that Kimura wanted to have a funded participation and so transfer the risk of non-payment to Yieldpoint. Yieldpoint wanted to participate for only a limited period even though the underlying transaction might not have the same maturity.

In an attempt to reflect what Yieldpoint wanted, a maturity date was inserted into the Offer without any further qualifications or provisions.

By the time of the maturity date of the participation, the obligor had not repaid the underlying transaction. Yieldpoint claimed its funding back. Kimura resisted, arguing that that Yieldpoint had recourse only to the obligor and it had not paid.

The decision

The exact terms of what the parties intended were the subject of the court decision. The court at first instance accepted Yieldpoint’s argument that, because of the maturity date provision in the Offer, the participation was to be repaid on its maturity date without regard to the position in the underlying transaction. 

That drove a coach and horses through the without-recourse structure of the BAFT MRPA. However, the document does say that in case of conflict, the terms of the Offer prevail.

Now, the question is whether a simple change – like inserting a maturity date – was sufficient to turn the participation into one of full recourse or not.

Fortunately for Kimura, the Court of Appeal reversed the decision and held that participations under a BAFT MRPA, including this specific Offer, were indeed without recourse to the seller. Notwithstanding the insertion of a maturity date, that was not sufficient to make Kimura liable. So Yieldpoint was only entitled to repayment of its participation if the obligor had repaid.

Outcomes

People will argue whether the case was rightly decided or not. 

The fact that the parties litigated is a stark reminder of what can happen if a transaction does not go how the parties envisaged. Simply put, Kimura wanted funding and would have regarded their document as achieving funding on a without-recourse basis. 

Yieldpoint appeared to believe that they were funding Kimura but without concern for what might happen in the underlying transaction.

At first glance, this seemingly strange conclusion turned on whether inserting a maturity date achieved the complete reversal of what a BAFT MRPA is normally used for. In other words, ignoring all the provisions about an obligor being a Recourse Party and the seller’s obligation being limited to paying over Recoveries – these being defined terms in the BAFT MRPA.

The fact that Yieldpoint convinced a judge of their argument is a lesson in itself, but the reversal by the Court of Appeal would appear to restore reason and reflect the support of the BAFT MRPA structure of a without-recourse sale by the seller with recourse limited to the Recourse Party.

How will the BAFT MRPA be used in the future?

If funding is to be by way of full recourse then perhaps using the BAFT MRPA is not the best way of proceeding. Or, if it is to be used, then it would be beneficial to include far more detail on what exactly is being agreed upon.

Maturity dates per se may work to this end, but where they do not exactly reflect the repayment date of the underlying transaction, care must be taken to reflect whether or not repayment of the participation is contingent or not.

Perhaps the main conclusion to draw is that careful drafting is needed when reflecting whatever is the subject of an Offer. The BAFT MRPA form of Offer is but a list of headings to be completed correctly to reflect what is offered and on what terms. 

Failure to be specific can result in potentially costly litigation and an unpredictable result.