High Court Considers Fair Market Valuation Of Sub-participation Right At Maturity Date

The High Court has found in favour of a participant in a dispute with a lender of record over the fair market valuation of participation rights on the maturity of a sub-participation that expired before the underlying loan: Yieldpoint Stable Value Fund LP v Quintar Kimura Special Credit Fund Ltd [2026] EWHC 1558 (Comm).

By way of refresher, in a typical funded participation arrangement a lender under a facility agreement enters into a back-to-back funding arrangement in respect of all or part of its participation in the loan to another party, and so mitigates the risk of default by the underlying borrower while remaining the lender of record. Typically, a participant would only have recourse to the underlying borrower and any credit support granted in relation to the underlying loan, and would therefore be exposed to the double credit risk of both the borrower and grantor of the sub-participation. Market standard documentation is often used, but arrangements can also be very bespoke.

The decision will be of interest to financial institutions as it illustrates the court’s approach to valuing distressed participation interests where the contractual documentation does not prescribe a valuation methodology. The dispute arose because the participation was an unusual asset, created by a mismatch between the one-year participation and the four-year underlying facility, for which there was no meaningful market against which its value could readily be tested. The court held that, in those circumstances, contemporaneous lender assessments of credit risk and recoverability could carry significant weight, particularly where the asset was bespoke, the lender was effectively the only realistic purchaser, and therefore uniquely well placed to assess the value of the underlying exposure. 

As a practice point, the decision sounds a cautionary note for lenders entering into bespoke participation arrangements. It is a reminder of the importance of expressly addressing valuation mechanics in participation agreements, particularly where a participation may mature before the underlying facility and the parties envisage a redemption payment based on the value that a third-party market participant would have paid on that date rather than repayment at par (ie. the value of the original investment).

We consider the decision in more detail below. 

Background

In 2019, Quintar Kimura Special Credit Fund Limited (Kimura) and another senior lender entered into a USD 45 million secured four-year loan facility (the MTV Facility) with a Chilean mining venture (MTV). In February 2021, Kimura and Yieldpoint Stable Value Fund, LP (Yieldpoint) entered into a Master Participation Agreement for Trade Transactions (the MPA), an industry-standard umbrella agreement permitting the entry into one or more participation agreements. In March 2021, pursuant to the MPA, the parties concluded a participation agreement (the MTV Participation) under which Yieldpoint paid USD 5 million to acquire a 22.22% share in Kimura's portion of the MTV Facility for a fixed term of 12 months, with a maturity date of 31 March 2022 (the Maturity Date). This created a mismatch between the one-year duration of the MTV Participation and the four-year term of the underlying MTV Facility.

By early 2022, MTV was experiencing significant operational and financial difficulties and defaulted under the MTV Facility. In February 2022, Yieldpoint notified Kimura that it would not renew the MTV Participation. By the Maturity Date, it was common ground that MTV was in default under the MTV Facility.

The question of what Kimura was obliged to pay Yieldpoint on the Maturity Date had already been the subject of prior litigation between the same parties (see our blog post).  In summary, the Court of Appeal found that the MTV Participation was a sub-participation agreement with early redemption, meaning Yieldpoint's capital was at risk during the one-year term. Following MTV’s default, Yieldpoint was not automatically entitled to repayment at par (ie. its original USD 5 million investment), but was instead entitled to the fair market value of its participation rights as at the Maturity Date. However, neither the MTV Participation nor the MPA prescribed a methodology for determining that value, and the Court of Appeal did not determine the valuation issue itself. The parties were unable to agree the appropriate valuation between themselves. Yieldpoint therefore brought the present proceedings, seeking a determination of the fair market value of the MTV Participation as at 31 March 2022. The parties’ experts agreed that the concept of fair market value commonly meant the price paid for an asset in arm’s length transaction between a willing buyer and a willing seller. However, they agreed on little else and adopted markedly different approaches to valuation. Yieldpoint’s expert valued the participation at USD 3.1 million to USD 5 million, relying heavily on Kimura’s contemporaneous internal credit assessments. Kimura’s expert, by contrast, valued it at only USD 200,000 - USD 300,000.

Decision

The High Court preferred Yieldpoint’s expert evidence and held that the fair market value of the MTV Participation at the Maturity Date was USD 3.115 million.

The key aspects of the decision which will be of interest to financial institutions are set out below.

Approach to valuation

Kimura’s expert argued that the proper exercise was to determine what a hypothetical buyer in the market would have paid for the asset as at 31 March 2022, when MTV was already in default. In its view, the fair market value depended on the creditworthiness of MTV as the borrower and its ability to pay the future price participation, interest and repayment of principal, assessed as at 31 March 2022. On this approach, Kimura’s internal valuation committee’s views were irrelevant.

The High Court rejected that argument. It underlined that a fundamental principle of valuation is to value things as they stand (the “reality principle”). As highlighted in JPMorgan International Finance Ltd v Werealize.com Ltd [2025] EWCA Civ 57, things are to be taken as they are in reality on the valuation date, except to the extent that the instrument postulating the hypothetical transaction requires a departure from reality. This means that events occurring after the valuation date cannot be taken into account. However, a purchaser may consider future possibilities, and it is their perception of those possibilities at the valuation date that matters. Also, if one person in the market is prepared to pay more than other bidders, then that higher price will be the open market value.

Relevance of internal credit assessments 

The High Court noted that if matters had proceeded properly, the contract value would have been arrived at by negotiation between the parties in the 45 days before the Maturity Date. The High Court emphasised that the subjective views of the parties should not determine the value of the participation. However, it considered that they (including Kimura's contemporaneous internal assessments) were relevant to the valuation analysis.

Applying JPMorgan, the High Court noted that, even absent MTV’s difficulties, the MTV Participation would have been an unattractive proposition for a hypothetical third-party market participant. This was due to the mismatch between the participation and the underlying facility, and the fact that it was a relatively small stand-alone investment. The reality was that it was not an asset which would realistically have been offered for sale in the open market, or one likely to attract much third-party interest. 

The High Court therefore considered Kimura’s own contemporaneous internal valuation assessments to be important indicators of market value because: (a) it was the party buying the asset – it was a market of one; (b) it was in as good position as any market participant to assess the position; (c) it was subject to regulatory obligations requiring accurate valuation of its assets; (d) it was subject to relevant accounting standards requiring expected credit losses to be reflected in its asset valuations; and (e) its valuation committee included external independent members, and was therefore unlikely to have failed to reflect the true economic reality of the MTV Facility.

In the High Court’s view, it was therefore proper to take these assessments into consideration when determining the value of the participation. The exercise was to measure the “deterioration in creditworthiness” by (but not beyond) 31 March 2022, to which they were obviously of some relevance. Also, the reality principle required the valuation to reflect the reality of the situation as closely as possible and not to depart from it unless this was necessary for the hypothesis to operate – the reality here was that it was Kimura which was the buyer, and Kimura was in a unique position to assess value. If Kimura as the specific redemption party was the one person in the market who placed a value on this particular right, then Kimura’s view was the open market value.

MTV’s prospects as at the Maturity Date

The High Court also preferred Yieldpoint’s expert evidence as it reflected conditions as they were known at the Maturity Date. By contrast, Kimura's expert had been influenced by subsequent events and effectively treated MTV's eventual liquidation as inevitable. In the High Court’s view, the valuation exercise had to be undertaken using only the information available as at 31 March 2022 and without the benefit of hindsight. On the contemporaneous evidence, restructuring efforts remained active, additional investment opportunities were being explored, and liquidation was not regarded as inevitable as at 31 March 2022.

Range of values 

The High Court acknowledged that the upper end of Yieldpoint’s expert’s range of values would lead to recovery of the entire principal. In its view, that would be inappropriate given that MTV was already in default of the MTV Facility and there had been a deterioration in creditworthiness which needed to be reflected in the value of the redemption rights. 

The High Court also rejected Yieldpoint’s argument that the middle figure of USD 4.09 million should be the minimum assessment of fair market value as it appeared to take account of the likely recovery against collateral. In its opinion, there was little evidence as to the true contemporaneous value of the collateral and a recovery rate of 81.8% in relation to an underlying loan which was already in default at that point in all the circumstances seemed too high.

The High Court therefore adopted the lowest end of Yieldpoint’s expert’s range as the fair market value. This was based on the metric of likely recovery based on Kimura’s internal solvency spreadsheets, which assumed that MTV would default on the loan and took appropriate account of the risk factors which were already present at the Maturity Date.

Accordingly, the High Court assessed the fair market value of Yieldpoint’s participation as at 31 March 2022 at USD 3.115 million and found that Kimura was in breach of contract in failing to pay it on that date. 

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.