RHG back in court over funding dispute

RHG Group yesterday launched an action in the Court of Appeal of the Supreme Court of NSW, seeking to overturn a ruling over a disputed loan contract that went against it in a judgement in April.

RHG is in dispute with a European bank, HVB, its Singapore branch UniCredit and an HVB special purpose vehicle Elektra Purchase No 19.

RHG has been doing nicely managing its mortgage book as it runs off. It earned a net profit of $120 million in the 2009 financial year.

The dispute with HVB, which has resulted in two separate court cases, threatens a substantial chunk of the firm's revenue base. The company has made only limited disclosures about its litigation.

In January 2008 RHG entered into a $750 million funding arrangement with HVB. RHG issued mortgage securities (Series UniCredit notes) to HVB, and ultimately those securities ended up with Elektra.

In the loan agreement RHG agreed to indemnify HVB for the "currency exchange and basis swap costs" involved in converting its euro loan to Australian dollars.

A dispute arose between the parties when HVB assigned the notes to Elektra. RHG argued that its obligation to provide the indemnity ended at that point.

RHG also argued that the currency exchange and basis swap charges were excessive. It said the charges had not been calculated in "good faith and in a commercially reasonable manner" as required by the funding agreement.

The disputed payments, totalling about $10 million, were put in a secure account pending the outcome of the litigation.

RHG's issue of mortgage securities to HVB has resulted in two court cases. Late last year HVB and its security trustee, BNY, notified RHG of an event of default resulting from arrears rates going above a prescribed level.

This set in train a process that would result in a special meeting of creditors, the appointment of a receiver to the trust and the sale of the assets to pay out the loan.

RHG went to court to seek relief, which was granted in September, and then the matter went back to court for a final hearing earlier this month.

At stake is the forfeiture of the Series UniCredit pool of mortgages managed by RHG, which would be sold to pay out the disputed loan.

RHG stands to lose a substantial revenue stream if the court orders it to forfeit the assets. RHG also faces the risk of cross-default under other borrowing obligations.

In the judgement handed down in April on the contract dispute, Justice Einstein held that HVB could assign its right to indemnification when it passed on the notes to Elektra.

This ruling was based on the view that it was the common intention of the parties that this is how the funding agreement was intended to operate and that disputed clauses in the contracted had been drafted incorrectly.

On the question of currency exchange and basis swap costs, Elektra argued that the phrase referred to the cost of entering into the swaps used to convert funding from euros to Australian dollars. RHG argued that the phrase referred only to the incremental cost of swapping.

The judge ruled that Elektra's interpretation of the phrase was the correct one.

At yesterday's hearing counsel for RHG argued that there was no evidence in the original trial that there was a common intention between the parties. This position was based on a detailed examination of the negotiation of the funding agreement prior to January 2008.

The hearing resumes today.