Workouts with distressed debt - Does choice of Trustee matter?

Distressed debt investors may well prove to be the financial sectors’ heroes of the crisis. DDI bring sophisticated financial and business acumen to the task of aggregating debt.

A key part of the DDI tool kit is their ability to work across the capital stack. Typically, they sit closer to equity than senior debt and are incentivised to ensure the long-term viability of the firm.

From the trustee’s perspective, the more complex workouts may involve beneficiaries with competing interests.

Consider a situation where some investors purchase a credit derivative as downside protection. In effect they become ‘empty creditors’ and face a different risk/return profile to their non-hedged brethren.

Titan Europe v U.S Bank involved another scenario in which the trustee needed to balance one tranche of investors’ interests (they wanted the trustee to hold assets long term), with anothers' call for asset disposal.

Given recent global events we can expect distressed debt opportunities to grow substantially as will the need for security trustees to be ready to deal with increasingly complex scenarios.