In January 2019, we wrote about a potential lawsuit against Fitch Ratings Agency by Squire Patton Boggs lawyers (SPB) who were trying to sign up clients to a litigation funding agreement (Click here for article). Our general advice at that time was for holders of Fitch rated SCDO products to hold-off signing up with SPB as a rival law firm was likely to come up with an alternative proposal.
The basis of our advice was two-fold. Firstly, our understanding was the alternative lawsuit was likely to provide more competitive funding terms than those offered by SPB and this may mean the overall proposal from the competitive firm is more attractive. Secondly, if a viable competitive proposal was to emerge it could have resulted in SPB offering more competitive funding terms as both sets of lawyers and funders competed for clients.
Since January, the rival law firm has been delayed in formulating its proposal because of difficulties accessing documents from the court. Positively the rival lawyers have now obtained the documents they need and will be able to make a decision based on their assessment of those documents and discussion with their funder in the next few weeks or at most within a month. Essentially, the rival firm is taking a cautious approach to ensure it has sufficient confidence the lawsuit has a high chance of success before committing to run the case.
We see this as a very positive development for holders of Fitch rated SCDO’s who have not yet committed to SPB because if the rival firm decides to run the case, it is likely to be able to obtain better funding terms than the ones offered by SPB. If the market is working correctly, this suggests SPB’s funder is too expensive and is not pricing the risk competitively. Alternatively, if the rival firm decides not to run the case, this will signal the case carries too much risk, in which case it will likely validate the funding arrangements SPB has in place as “good value”. In this case our general advice will likely be for clients to sign up with SPB as it is the only deal on offer and there is external validation of the funding terms, while overtly expensive, are fair given the speculative nature of the case.
Our advice is again for investors who have not already committed to SPB to wait for the rival firm’s proposal and to see if one emerges over the next month. As the rival firm now has the documentation it needs, a decision should follow shortly.
If a rival proposal with cheaper funding emerges, this should be a major consideration for claimants as to which action to join. This is because if the case goes to court and claimants are successful, claimants should get a larger net sum if they are with the cheaper funder. In the alternative, if the case is settled before going to trial, then the amount received by claimants is what each set of lawyers can negotiate, but funding costs should also play a part, particularly if Fitch has a maximum gross payment it is willing to make to settle the case.
We believe it would be prudent for the those who have not yet committed to SPB to give themselves the option of assessing the alternative proposal before deciding whether to commit to SPB or the alternative. Our overall feeling is that since both cases will be funded, investors should probably join one case or the other in time as with a litigation funder, this is essentially a “free kick” where claimants are paying away part of the upside to eliminate all downside financial risk.