Briefly Speaking: The Importance of an Independent Indenture Trustee

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Annie: Hello, everyone, and welcome to today's webinar, "Briefly Speaking: The Importance of the Indenture Trustee in Corporate Bond Deals." My name is Annie Triboletti, and I will be your moderator.

Joining us today are Dan Fisher, Adam Berman, and Helena Ledic. Dan is the Executive Vice President of CSC Global Financial Markets and its wholly-owned subsidiary, Delaware Trust, and head of U.S. Capital Markets. Dan is responsible for leading Trust and Agency, Independent Director, and U.S. Capital Market services, helping CSC expand these businesses in the United States and coordinate with our global offices. Adam is the Managing Director for Trust and Agency services at Delaware Trust, which is a wholly-owned subsidiary of CSC. Adam is responsible for expanding the corporate trust services of Delaware Trust and has more than 25 years of experience in the corporate trust business. Helena is the Associate General Counsel for CSC in the Chicago office. She is a business attorney advising senior management and law firms on strategy, business, legal, and technology matters.

And with that, let's welcome Dan, Adam, and Helena.

Helena: Thank you, Annie, and thank you to our audience for attending "The Importance of the Indenture Trustee in Corporate Bond Deals." Before we get started, first a little bit about CSC. We work with more than 10,000 different law firms and 180,000 corporate clients. We work with more than 65% of the 100 Best Global Brands, including 7 of the top 10. We also provide solutions to more than 3,000 financial market customers. We serve 90% of the Fortune 500. We've been named a Top Workplace for 13 consecutive years, which we're very proud of. And we're headquartered in Delaware and have more than 50 offices throughout the world.

You heard a little bit about CSC, but let's talk a little bit about Delaware Trust. Delaware Trust is a leading, non-lending institution of corporate trust and agency services. It's a wholly-owned subsidiary of CSC and is a fully regulated institution. It's independent and stable. It's been privately held for more than 120 years. The people who work for Delaware Trust are very experienced. We hire the best-in-class experts from finance, legal, and banking industries. It's well capitalized. There's more than $100 million surplus. And we're very customer-centric. We're ranked best-in-class for service, with an 84 Net Promoter Score, which we're really very proud of.

And now let's talk about our agenda. We'll start off with a corporate bond background, and then we'll go into the indenture trustee overview and function. We'll also talk about the important characteristics for an indenture trustee. We'll talk about the Delaware Trust advantage, and then we'll go into a Q&A session. And now Dan will get us started off.

Dan: So today I thought I'd give a little bit of a background on the reasons why companies raise capital. They raise capital in a couple of ways. They can do it publicly or privately through debt issuance, which would be bonds or notes. They do it through equity, which would be the stock market. And they do it to fund their ongoing business enterprises.

Among the type of capital projects are business expansion, which would be taking them into new markets, buying new buildings and properties for their business, new products or services. And in many ways, they just continue to do this as a way of keeping their business enterprise fresh and ongoing in new directions.

So another type is M&A. They will buy another company, an acquisition or a merger with another company, or even a joint venture so that they can collaborate on projects or project financing.

They could do it through R&D investments. That's research and development. And they do this for the purpose of new products and services creation, to stay ahead of the competition, to streamline existing products and services.

And additionally, they can do it to stave off competitive threats. They can invest in capital to innovate or to support strategic investments and basically always compete with the marketplace.

Adam: Hello, everybody. This is Adam. And picking up from where Dan left off on background of corporate bond issuance, I thought I'd talk about corporate bonds themselves.

What is a corporate bond? So a corporate bond is a type of debt security that's issued by a company and sold to investors. So, unlike the bank loan, these are actually issued to individual bondholders.

What happens here is that the company gets the capital it needs. The investors, who are the bondholders, they're going to have a pre-established type of interest schedule. So it could be fixed-rate or a variable-rate interest. And then the bond will have an expiration date. And in the industry we call that a maturity date. So when a bond reaches maturity, the principal, or that's the money that's been lent, is paid back to the bondholder.

Aside from that, once the bonds are issued, there is called a secondary market. And that's an active market where bondholders will be able to trade these bond securities to each other throughout the life of the bond until that maturity date. So the person that initially becomes the bondholder from day one doesn't necessarily have to be that bondholder at the maturity date. They trade these securities back and forth.

Dan: So continue with a step further along the lines of what Adam was just telling us, there is an important role that is played in all the corporate bond issuance activities, and the role of the indenture trustee is at the heart of it. The Trust Indenture Act of 1939 was itself established to police the issuance of securities. It was an extension of the Securities Act of 1933 that had been passed by Congress.

And they did it within the context of the stock market had crashed in the late '20s. There was an economic collapse. As a result of that, banks closed. And it all led to the Great Depression. So much securities fraud and bad dealings had taken place during that prior period of time, when the economy collapsed, that this act was passed by Congress as an amendment to the act by which they created the Securities and Exchange Commission, and basically regulated all securities dealings.

It's a law that prohibits bond issues valued over $5 million from being offered for sale without a formal written agreement. That written agreement is called an indenture. Both the bond indenture and the trustee selected for the issuance of bonds must sign the indenture, fully disclosing particulars of the bond issue. So this entire mechanism is meant to be a policing structure by which the trustee stands at the heart of it, basically traffic control and the trustee acting as a traffic cop.

So a trust indenture or indenture agreement is the governing agreement at the heart of this. It represents the bond issuer's rights under the agreement, but the trustee itself represents the bondholders' interests by highlighting both the rules and responsibilities of the parties involved. An indenture trustee is appointed as a type of agent on behalf of the bondholders collectively. So they stand in place of the bondholders as a whole, 100% of them, and they don't represent the interest of any particular bondholder. They're fiduciary on behalf of them.

Adam: Okay. So picking up from where Dan left off about the Trust Indenture Act and the indenture and the trustee, I wanted to talk a little bit about what the bond indenture trustee does. Dan mentioned previously about policing. So that is essentially the heart of what an indenture trustee should do.

Now, when we take on a transaction as an indenture trustee, though, we typically have a very sort of passive and administrative role. And what I mean by that is that we are always policing. Yet in the time of health of a company, our role should be laid out in the indenture as what we call passive administrative. So what we're going to do is we're going to monitor compliance tasks that the company should be providing to the bondholders through the trustee. And these are covenants in the indenture. So these might be certificates that certify that they're not in default, or financials that they are supposed to share with the investors, who are the bondholders, etc.

The other thing that we typically do is act as a registrar, and the registrar is keeping a list of all the bondholders that are out there. So whether these are physical bonds with hundreds of bondholders who hold certificates or if it's one bondholder through a depository, we will keep tabs on that as a registrar.

And then the third thing we do is acting as a paying agent. And we will facilitate payments of interest and principal that are due back to the bondholders from the company. They will send it to the trustee, and the trustee will disperse it out amongst them.

Where our role changes a bit and it becomes a more active role is in a time of distress, or bankruptcy filing of the company, or in event of default. So we will work with the bondholders and represent them as their voice. We will help pursue remedies, ensuring payments that are made back to the bondholders. We'll have a seat at the table. We will negotiate on their behalf with the company during their work-out situation and trying to come out of bankruptcy. And in certain cases, if these are unsecured bonds, we may try to sit on a unsecured creditors committee. So, again, that's how we have a more active role and, again, with the overall theme of the policing that Dan mentioned earlier.

Okay. And now this next slide I just wanted to show everybody is a bit of a visual on what I just described earlier. Me being a person who likes to see visual things more than words, I thought this would be helpful for the audience. As you can see, we have on the left is the bondholders, investors who are lending the money to the company, which is all the way to the right.

And there we are in the middle the indenture trustee. And just as I described earlier, you can see the arrows and the flow of how this works, where money is coming in from the bond issuer, through the trustee, back to the bondholders for their payments and their covenant items, and then essentially they make that loan to the company, which is the initial issuance of that bond.

Okay. Now, continuing on, I wanted to talk about some of the standard roles that the indenture trustee and other related roles are involved with this. Now, I mentioned this a little bit earlier. There's the trustee, the registrar, paying agent. And just to go over that real quick, the trustee, as we know, is the sort of policing entity who watches over on behalf of bondholders. The registrar is the role where we keep a list of the bondholders so we know who they are in fact. And the paying agent where money is paid from the company back to bondholders. Principal and interest is the paying agent's role.

Now, I didn't really talk about secured bonds much, but in a secured bond, we have often a collateral agent. We could play that role. The collateral agent will have liens of the company's assets and properties pledged to them, so in the event of a default, we have that first-priority lien on those assets because essentially that is what's going to be liquidated or sold to pay back the bondholders. So we could act in that role as well.

A successor trustee, which is another role that we often play here at Delaware Trust, is a trustee that will come in when another trustee that is existing can't act as trustee anymore. So we do see from time to time where a trustee may have a conflict, or it's possible that the trustee is not eligible to act as that trustee anymore. And in that case, they will have to look for a new trustee. And a successor trustee is the term used. And, again, we play that role at Delaware Trust quite often.

The last thing I wanted to mention as another role is what we call an exchange and tender agent. So often, as companies have bonds outstanding, they will look for, you know, new bonds, and in that, they will maybe say they'll offer the bondholders a chance to exchange them for these new bonds. Or they may even ask them to tender the bond in, and there's always this agent role that has to be there to monitor it and see what's coming in, and what the final payment is for the company to pay off or exchange those bonds. We could act in that role as well.

Dan: Well, having heard a lot of information about corporate bond issuances and the role of a trustee, I think it's important to talk about the characteristics of the indenture trustee, what makes one an ideal trustee. A trustee should be regulated, independent, and conflict free. There's a tendency to think that a big bank or a big trust company is a better choice than one that does not have lending, for example. But the corporate lending creates conflicts, especially in default or bankruptcy situation. So it's important to not have your indenture trustee be on the transaction for any reason other than to service the transaction, to protect the bondholders on the bond issuance, and to make sure the companies get the service that they deserve.

The trustee should have experience managing bond issuance. How long a trustee has been in the business matters, the depth of their experience, the expertise of the staff that will be working on the transaction.

A trustee should be accessible in the event of a default or bankruptcy. Again, big banks with lending conflicts, they're going to be conflicted in many situations, and the bondholders deserve a trustee that really represents their interests, that aren't potentially putting the lending interests ahead of theirs.

And a trustee should be well capitalized, the ability to meet the eligibility requirements that are set forth the most indentures. Capitalization is really important because it equals the financial capacity of the trustee to remain in business. It provides stability to the transaction to know that trustee is going to be a long-term trustee fiduciary for them.

Adam: Yeah. And, Dan, I just wanted to highlight one of the points you brought up about being accessible in event of default or bankruptcy. I think this is one of the key aspects of what's important about a trustee in that, like as you mentioned that in the lending relationship or conflicts, that the bigger banks or trust companies will have a conflict, well, that's pretty evident.

And sometimes it doesn't even get to the point of a default or a bankruptcy. It could just be any sign of distress where they're managing their relationship as a banking entity, so from a corporate or investment banking standpoint to then managing the trustee aspect of it. So any sign of distress, they look to resign. So I think that's a really important aspect about being accessible during an event of default or a bankruptcy.

Dan: So having just heard about the important characteristics of the indenture trustee, why a particular indenture trustee is ideal for a corporate bond issuance, I'd like to tell you about why I think the Delaware Trust advantage makes us the ideal selection for providing that role. We are regulated, we're independent, and we are well capitalized. We're capitalized to $100 million. This means that we meet and in most cases, exceed the requirement to be an indenture trustee. We meet all the regulatory requirements.

We are driven by relationships, not volume. We are well-known for our high-quality customer service, and so that is really a reflection of the fact that we put the relationships we have at the foremost of our services. We are not looking to be a high-volume cookie cutter shop. We are really taking the time to work in a partnership with our clients and with our bondholders.

We provide bespoke and flexible client experiences. So we can customize our documents and our services to meet the requirements of a particular transaction. Again, not looking for it to look like every deal before it. We are able to meet the specific needs of this particular transaction in front of us.

We are a full-service trustee. We have the capabilities to serve as trustee or agent on the full array of debt service products that are out in the marketplace.

And finally, and I think most importantly, we are growth mode. We are continuing adding people, products, and services to our mix. We look for great people with expertise, whether they're already with us or they're out in the marketplace looking to join on with a trustee with long-term future. We're expanding our business, unlike niche players who come in for a particular product, or they're in and out of the business, or the money center banks and trust companies that are downsizing or shedding various product lines.

So we find it very important to tell our clients and our potential clients that we're here to stay. We're 100 years plus experience already. We're not going anywhere, and we are the provider out there who is continuing to grow.

Helena: Well, everyone in our audience, that is all the time that we have today. I'd like to thank Annie for getting us kicked off, and then Dan and Adam for walking us through the "Briefly Speaking Webinar Series: The Importance of the Indenture Trustee in Corporate Bond Deals." We hope to have you join us again for a future webinar. And, of course, if you have any questions, reach out to us. Have a great rest of your day. Thanks so much for attending.