Managing Director | CSC Global Financial Markets
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An indenture trustee’s daily responsibilities are often overlooked relative to their post-default duties. So, it’s not surprising that the bond market has not seriously examined the role of the indenture trustee pre-default since enactment of the Trust Indenture Act of 1939. But a lot has changed since 1939:
- The sheer size of the bond market—standing at $46 trillion in the U.S. and $119 trillion worldwide in 2021—has the potential to cause significant adverse consequences on the economy.
- Institutional investors, not retail, now dominate the industry, but there are still fiduciary duties that the trustee must fulfill on behalf of the investors pre-default.
- Finally, activist investors engaging in high-risk investing often end up as active participants in many distressed bonds.
To avoid liability risk and maintain economic stability, it is imperative that indenture trustees have a firm grasp of their pre-default duties as well as their duties after default. That’s why selecting the right indenture trustee at the deal’s onset is critical to the transaction’s success. Below, I’ve outlined our top four characteristics of an indenture trustee that should be considered pre-closing for a better post-closing.
Experience: Having a team of professionals that understands the corporate bond market and its complications and risks sounds cliché, but is essential. All deals are different and a team that anticipates issues/challenges and delivers the right solution can save everyone headaches down the road.
Service: Many providers are quick to offer services prior to the closing but providing high service levels after the closing is just as important. Indenture trustees that pick up the phone, answer questions, and respond to their clients in a timely manner make for a better experience and a more successful transaction.
Operational efficiency: Burdened by risk and compliance concerns, many of today’s large financial institutions are caught up in their own bureaucracy, moving decision-makers farther away (maybe in even different time zones) from the actual day to day. The KYC process, for example, has long been a major challenge for large institutions and a source of contention for clients trying to get a deal done on time. It’s important to look for a flexible provider incorporating a team of risk managers and service managers for a seamless and quick delivery during the initial process and through the bond’s duration.
Independence: Many indenture trustees are from the same lending institutions and may have to resign from the transaction because of conflicts, either actual or perceived. Opting for a true independent provider limits this risk and ensures a smooth transaction in the event of restructuring.
Experience matters
Delaware Trust, a wholly owned subsidiary of CSC and fully regulated institution, is a leading provider of corporate trust and agency services headquartered in Wilmington, Delaware. We are a boutique provider that supports alternative asset managers, capital markets participants, and corporate and institutional borrowers and debt issuers. We offer a suite of indenture trustee services for corporate bond issuances, including high-yield, investment-grade, private placement, project finance, cross-border bonds, restructurings, and more. For more information, visit delawaretrust.com or email steve.giurlando@delawaretrust.com.