Structured Finance Litigation: CRSM v. Barclays
March 31, 2011
David M. Ellis
Mr. Justice Hamblen of the Commercial Court in London recently handed down a judgment in which he dismissed all claims that had been brought against Barclays. The claim related to a series of structured finance notes (CDO2) with a combined par value of EUR 230 million which were structured by Barclays and sold to Cassa di Risparmio della Repubblica di San Marino SpA (“CRSM”) in 2004 and 2005 and to a subsequent restructuring of the transactions. CRSM initially brought a claim for misrepresentation but shortly before trial amended their pleading to fraud.
The decision in this case has implications for both the banks that create and structure CDOs and the investors who purchase them. This article gives a brief summary of the transactions underlying the case, the key findings by the judge, and some of the implications of the judgment.
In December 2003 Cassa di Risparmio della Repubblica di San Marino SpA (“CRSM”) was seeking funding for its consumer finance subsidiaries, known as the Delta Companies, and approached Barclays. Barclays determined that securitisation, CRSM’s preferred funding method, was not feasible and instead proposed that the loan be supported by credit linked notes (CLN) bought by CRSM.
The total amount lent by Barclays to the Delta Companies was €700m, spread over several tranches and over a period of 8 months, and supported by five CLN transactions with aggregate principal of €450m. One of the CLNs did not contain a CDO component and was not part of the claim. The four disputed CLNs were comprised of €176m credit default swaps(“CDS”) on the Delta Companies, and €230m in CDO.
The CDO were all single-tranche synthetic transactions, where CRSM purchased a bespoke mezzanine tranche and Barclays effectively held the equity and senior tranches. Each CDO consisted of six inner CDOs and AAA-rate ABS such that the overall rating of each Note was AAA.