Vol 1 (2004) - Issue 5

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The Cross-Border Trustee: From Behind the Scenes to Center Stage

Introduction

Investors of debt globally typically have a mere cursory awareness of the existence of the corporate/commercial trustee administering their debt investment. When times are good and corporate default rates are low, the trustee quietly goes about the business of coordinating payments and redemptions, monitoring compliance items under the trust documents and generally working behind the scenes to assure the peaceful administration of the securities on behalf of their bondholders.
In less happy times, when things begin to sour for a company, investors of all shapes and sizes rapidly turn their attention to all parties relevant to their securities who might potentially provide information as to the performance of the company and the prospects of future debt service on their securities. At this point, the trustee’s profile on the transaction begins to elevate rapidly. By the time a material event of default occurs under the trust documents, bondholders have placed the trustee center stage as a source of information and a repository for complaints, suggestions, concerns or grievances. Often, the trustee represents the only prospective party to whom bondholders may turn for a measure of hope for some recovery on their investment.
Although sophisticated investors generally have vast resources to implement measures for the recovery of their investment, in many markets there remains a large investor community of retail-based holders and their brokers who turn to the trustee as their sole source of information and, more importantly, representation in any forthcoming workout negotiations or insolvency proceedings.
The role of the trustee in global insolvencies is underscored by these expectations of their investors. The trustee’s duties and responsibilities are enumerated in the documents governing the debt issuance and governed by the laws of the jurisdictions involved, but the reality is that the trustee must navigate the same complex global insolvency environment as investors while at all times fully maintaining its fiduciary responsibilities to them.

Global reach

Many of the banks and trust companies focused on developing a global corporate trust business maintain multiple trust offices throughout the international markets from which they derive significant volumes of new trust appointments. Although this type of globally focused trust business may have a single management structure, invariably many trust offices evolve into self-contained trust businesses focused primarily on the legal and practical concerns of doing business locally.
Although these local trust departments may naturally evolve to reflect the character and nature of the specific market they serve for their non-distressed issuers, whether it is the US, UK, Asia or other, in a potential insolvency by a client who is a debt issuer with global debt or global businesses, the trustee is shaken from their insular environment and forcefully returned to their original purpose of serving as a true global trustee.
Many trustees do not have the capabilities, staffing or risk appetite to provide local or global trustee services for distressed or insolvent companies. These trustees will often choose to implement their delegation or resignation rights under the governing trust documents and seek the appointment of either a ‘delegated’ or ‘successor trustee’. A delegated trustee is more common under trust deeds in the UK and Asia, whereas a successor trustee is more common in the United States. The Trust Indenture Act of 1939 (the ‘TIA’), as revised, compels the resignation of a US trustee under certain conditions, including the existence of a lending or other conflict or serving as trustee for multiple levels of non-pari-passu debt.