United States: Premium – In Whose Interest?

Last Updated: April 13 2015
Article by Tawnee Ebbs

Most Read Contributor in United States, December 2018

Loan investors and traders take note of the Judgment of the UK Supreme Court on 11 March 2015 in Tael One Partners v Morgan Stanley & Co International PLC [2015] UKSC 12.  The Court addressed the treatment of loan "premium" under the LMA Standard Terms and Conditions and whether it is for the account of the Seller or the Buyer.

The Loan Market Association ("LMA") Standard Terms & Conditions for Par & Distressed Trade Transactions (Bank Debt/Claims) (the "Terms and Conditions") are the recommended set of terms published by the LMA and commonly used for the trading of loans and claims in the secondary market outside of the United States.  It is important to remember however, that the LMA Terms and Conditions may not expressly address all the underlying loan economics or reflect the status of the borrower's restructuring, and traders are free to negotiate specific terms at the time of trade where there may be any ambiguity as to who receives the benefit of certain fees, interest or premium.

Tael One Partners Limited v Morgan Stanley & Co International PLC [2015] UKSC – The Facts:

The appellant, Tael One Partners Limited ("Tael") was one of a number of lenders under a US$100 million syndicated facility agreement ("the "Credit Agreement") to Finspace SA (the "Borrower").  It sold and transferred $11m of its total $32m participation in the loan to Morgan Stanley & Co International PLC ("Morgan Stanley") on 14 January 2010 which was documented by a LMA trade confirmation (incorporating the LMA par terms), transfer certificate and pricing letter.

The Credit Agreement provided for a payment premium to be paid by the Borrower to the lenders at the same time as prepayment or repayment of the principal of the loan, which enhanced the rate of return to the lenders to a total of either 17% or 20% per annum, depending on the circumstances in which the loan was prepaid or repaid.

The trade transaction settled and the pricing letter executed by the parties made no reference to premium, nor did it provide for any further payment by Morgan Stanley to Tael in respect of premium.

In March 2010, Morgan Stanley sold its position under the Credit Agreement to Spinnaker Global Strategic Fund Limited.  The Borrower refinanced the loan and prepaid it in full on 16 December 2010.  In accordance with the premium provisions, the Borrower paid an amount in respect of premium to all the lenders who held a position in the Credit Agreement on the prepayment date.  Those lenders included Tael and Spinnaker, but not Morgan Stanley.  Tael then claimed under the LMA Standard Terms and Conditions that Morgan Stanley was required to pay the premium to Tael in respect of the US$11m participation, so far as it had accrued as at the date of transfer (14 January 2010).

What is "premium" and how do the LMA Terms and Conditions apply?

The LMA Terms and Conditions do not define the concept of "premium".  There was some debate by each court as to whether premium constitutes interest or a fee, and if a fee, whether it is to be considered a "Recurring Fee" (which is defined as a fee expressed to accrue by reference to time elapsed) or a "Non-Recurring Fee" (being any fees that are to be paid to a Lender that are not Recurring Fees).

On reflection of the arguments, premium was not considered to be "Interest" as defined under the LMA Terms and Conditions; however, it was capable of being a "Fee".  The Judge at first instance considered that payment premium could be characterised as a fee for a service i.e. making the advance available and is analogous to a commitment fee.

In the Court of Appeal, Tael argued that although the premium did not fall within the main interest allocation provisions, condition 11.9 Allocation of Interest and Fees (now condition 15.9) created an extra entitlement that included the premium i.e. if a fee had not accrued by the settlement date, but accrued at a later time while being referable to a period before the settlement date, such fee was payable by the buyer to the seller. 

Longmore LJ rejected that argument, noting that condition 11.9 did not use the words "shall pay", "payment", "be payable" or "paid" but instead uses the phrase "shall be for the account of".  This wording indicated that its purpose was to describe how sums payable (under other conditions such as settled without accrued interest or trades flat) should be dealt with.  It did not create an extra entitlement for the seller to be paid further amounts by the buyer after the settlement date.

A Recurring or Non-Recurring Fee?

The question for these purposes is whether the premium is "expressed to accrue by reference to time elapsed" and therefore a Recurring Fee.  The payment premium was found to accrue on a specific event (repayment or prepayment in full of the facility) and it was only the quantum of premium that was determined by reference to the lapse of time.

The Supreme Court (overturning the Court of Appeal's decision on this point) confirmed that, while it is true that a period of time enters into the calculation of the amount of the payment premium, the entitlement to a payment premium under the facility agreement accrued on a defined event.

The Judgment continues to provide that the purpose of the premium is to reward the lender for the borrower's use of the money over a period of time, but that does not mean that the premium is "expressed to accrue by reference to the lapse of time".1

Although there is an argument that part of the premium relates to the period prior to the settlement date, that does not mean that the premium can be regarded, retrospectively, as having notionally accrued over that period.  The calculation of the quantum of the premium should not be confused with the accrual of the right to the premium.  Following this analysis, a premium would not fall within the definition of a Recurring Fee and would therefore be akin to a Non-Recurring Fee.

Recent secondary loan market examples of "premium"

We have seen some debate in recent months as to how "premium" clauses are intended to operate under German law governed loan agreements.  Under the German Civil Code, a lender and a borrower may not agree on compound interest in advance.  The prohibition of compound interest means that payments in kind ("PIK") as typically provided for in English law mezzanine instruments are, under German law, not enforceable, and structures that aim to achieve the same result as a PIK structure have to be tested against the question of whether they constitute a circumvention of the prohibition of compound interest and are therefore not enforceable.

One way of addressing this prohibition is including the provision for "premium" which is often drafted as a one-off fee due to the lenders upon final repayment or prepayment in full of the relevant facility.  At that point, it provides for the payment of a premium and such interest accrued at the premium rate will not be added to the principal during the term of the loan. 

Prior to the Tael case, some counterparties were treating premium as PIK interest.  As such they were accounting for it as part of the Traded Portion up to the Trade Date as if capitalised and payable at the purchase rate by the Buyer on the Settlement Date.  The Supreme Court Judgment now clarifies that it is to be treated as a Non-Recurring Fee under the LMA Terms and Conditions and is therefore for the account of the Buyer.


The fact that a dispute regarding the secondary loan market standard terms can ascend to the UK Supreme Court reinforces the position that the LMA Terms and Conditions are only a start point for negotiation and may not adequately address all economic or other rights of the seller and buyer in relation to a particular credit agreement.

Following the Tael Judgment, the LMA Secondary Documentation Committee is considering revising the standard terms and conditions to expressly include provisions for "premium".  Until then, to avoid any misunderstanding, if you are trading a loan with premium, better to be explicit regarding the parties' expectations at the time of trade.


1 Lord Reed, Tael Supreme Court Judgment, para.43

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions