What is a security trustee?
What is a Security Trustee and do I need to appoint one?
Here we consider the role of a Security Trustee in relation to a group of investors holding secured debt securities (Bonds, Loan Notes).
Many secured debt securities require a corporate entity or person to act as the security trustee. The company (“Borrower”, “Issuer”) issuing the securities (Bonds, Loan Notes) receives money from lenders (“investors”) under the terms of the Bond or Loan Note instrument. The instrument may include a charge over property, a debenture over the assets and undertaking of a company, a bank account or a combination of other types of security to secure the Borrower’s obligations to the investors under the instrument. The security trustee holds the charge for the benefit of the investors.
The security trustee, whilst not acting for the Borrower, is appointed typically by the Borrower as an independent trustee to represent the group of investors, holding a charge or debenture on their behalf until the terms of the facility agreement are fulfilled. Typically, a security trustee does not have any day-to-day involvement in the operation of the company, nor does it have any oversight or control over the company’s officers, unless specifically required under the terms of the Security Trustee Deed Agreement which governs the trust and the security trustee’s role.
The security trustee’s primary responsibility is that of acting impartially but representing the interests of the investors should the Borrower fail to meet its financial obligations under the terms agreed in the Security Trustee Deed Agreement or instrument. In most cases, the Security Trustee is given wide discretionary powers to enforce the security in the event of default by the Borrower. Similarly, if the security trustee is called upon to act by a specified percentage of the investors (usually 75%), the trustee would act in accordance with their wishes usually by appointing insolvency practitioners and placing the company into administration, receivership or to liquidate the Company. In either scenario the assets charged in favour of the security trustee are ring fenced and protected from unsecured creditors of the company on behalf of the investors.
Is appointing a security trustee a form of financial guarantee?
No. This is probably the greatest misconception of a security trustee. A security trustee is there only to hold security via a charge in favour of a group of investors. There is no guarantee that the value of the assets will cover the borrower’s financial obligation to the investors. These are unrelated.
The role of the security trustee is to facilitate enforcing the security over the charged assets, appointing administrators to take control of the Borrower with the view to returning as much value to the Investors as possible in the event of a default. The amount returned, if any, is subject to market conditions at that time.
Why is a security trustee important?
Using a security trustee provides a level of comfort to investors, that should the Borrower not meet its obligations, they have an efficient, co-ordinated means of enforcing their charge. A single charge held by an independent party on behalf of all investors, saves each bondholder taking their own charge and potentially appointing their own legal representative to enforce it – all of which would erode the Borrower’s remaining capital, further reducing the possibility of an investor getting their money back.
In the absence of a Security Trustee, and if, for example, a Borrower had issued Bonds to say 500 investors, one could see the logistical problem of 500 competing charges being registered against the Company all jostling for priority in the pecking order following default. This would be time consuming and costly for all parties involved. By having a single form of security in favour of all investors allows equal and fair treatment to all investors.
It is not a legal requirement for an Issuer of debt instruments to appoint a security trustee, however it does demonstrate a level of recognition and responsibility to its investors
The benefits for the Borrower of appointing a security trustee include only having a single securitised counterparty to deal with. Should during the course of the loan note or bond, the transaction change in terms of its underlying assets or collateral, having a single counterparty to deal with is a lot simpler for the Borrower rather than having to reach out to at least 75% of its investors to approve the changes.
Further administrative benefits include avoiding the inconvenience and cost of transferring the underlying security each time a new beneficiary is added, or an existing beneficiary transfers its interest. It may also be impractical or not possible to include a large number of beneficiary names on a relevant register – for example the Land Registry, should a charge be taken over property.
Why Bluewater Capital?
Bluewater Capital have acted as Security Trustee for a large number of listed and unlisted offers. We have experience in working with issuers to restructure current offers and managing the delicate process when Borrowers do not meet their financial obligations to their investors.
If you would like to understand more about the role of a Security Trustee or would like Bluewater to assist your offer, please contact us on 0121 725 1949.
Please note this article does not constitute legal advice and should not be used as the basis for any business decision.
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