What is the role of a trustee in bond issuance?

1 Trustee definition

A trustee is an independent third-party entity, usually a bank or a trust company, that acts as a fiduciary agent for the bondholders. The trustee is appointed by the issuer and the underwriter, and its role and responsibilities are defined in the trust indenture, which is the legal contract between the issuer and the bondholders. The trustee's main duty is to enforce the terms and conditions of the trust indenture and to safeguard the bondholders' claims on the issuer's assets and cash flows.

2 Trustee functions

The trustee performs numerous functions depending on the type, structure, and features of the bond. These functions include acting as a paying agent, registrar, monitor, collateral agent, and representative. As a paying agent, the trustee collects the interest and principal payments from the issuer and distributes them to the bondholders on the due dates. As a registrar, the trustee maintains records of bondholders and their ownership, transfers, and conversions of the bonds. As a monitor, they observe the issuer's compliance with covenants to protect bondholders' interests. If there are any breaches or defaults, they report these to the bondholders and take remedial actions if needed. The trustee also holds collateral or security that backs the bond and ensures that they are valid and sufficient. In addition, they represent the bondholders in negotiations or lawsuits involving the issuer and may initiate legal actions to recover their claims or damages.

3 Trustee benefits

The trustee provides several benefits for both the issuer and the bondholders. For the issuer, the trustee reduces the administrative burden and complexity of managing multiple bondholders and payments. The trustee also enhances the credibility and reputation of the issuer, as it signals that the issuer is willing to abide by the trust indenture and respect the bondholders' rights. For the bondholders, the trustee offers protection and assurance that their investment is secure and that they will receive their contractual payments and remedies. The trustee also facilitates communication and coordination among the bondholders, especially in large and diverse bond issues.

4 Trustee fees

The trustee charges a fee for its services, which is usually a percentage of the principal amount of the bond or a fixed amount per bond. The fee may vary depending on the size, complexity, and duration of the bond issue. The fee is typically paid by the issuer, but it may be passed on to the bondholders as part of the interest rate or the issuance cost. The fee is disclosed in the offering document or the prospectus of the bond.

5 Trustee selection

The selection of the trustee is an essential decision for the issuer and the underwriter, as it has an impact on the success and reputation of the bond issue. When choosing the trustee, both parties may take into consideration several factors, such as experience and expertise, reputation and reliability, capacity and resources, and fees and terms. The trustee should have a solid track record in the bond market with knowledge of the legal and regulatory environment, as well as a high degree of professionalism, integrity, and independence. Additionally, they should have adequate staff, systems, and infrastructure to handle the volume and complexity of the bond issue. Finally, they should offer competitive and transparent fees and terms that are in line with the issuer's and bondholders' expectations.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?