#10298 - Chosing Trustee V Fiscal Agent Managers Clearing Systems Ws 8

Outline the differences between a trustee and a fiscal agent and advise which would be best for Alexandria. Explain whether Christine is right or not, giving your reasons.

Choosing between a trustee and a fiscal agency (can’t have both) Technically you could have both but this would involve unnecessary fees, duplication of roles and extra administrative load. where security is not offered and there are no subordination issues, a Fiscal Agent will usually be the best option for the issuer
	TRUSTEE	FISCAL AGENT
WHO APPOINTS THEM	Appointed by Issuer	Appointed by issuer (it is the issuer’s representative and agent)
¿DUTY OWED TO?	Owed under common law and contract (via the trust deed) to the Bondholders	Owed to issuer (via Fiscal Agency Agreement)
COST	More Expensive as will have to hire a specialist Trust Co. – will also need to pay for a Paying Agent	Cheaper as there are more banks willing to act as Agents – “en plus” the Fiscal Agent also performs role of Paying Agent (pay once only)
¿WHAT IS THEIR ROLE?	Holds on trust for the benefit of the BH the issuer’s covenant to pay the BH Has investigative and monitoring powers, even if these are not duties spelled out in the trust deed, the duty to act in the interests of the BH means that he will look at the issuer’s accounts/info available from the Co. if has any power to do so.	Responsible for payment of capital and interest to the bondholder. Publishes notices to BH and acts as depository for accounts. Has no investigative or monitoring powers. Owes no duty to BH to review or asses the issuer’s accounts and info.
SECURED ISSUES	Holds security on trust from time to time for all BHs from time to time. Stops impracticality of individual BHs holding it & it passing hands when bond was sold (could restart ‘hardening period’)	Can’t hold security on trust for BHs as he is agent of the issuer and thus acts in the issuer’s interests.
SUBORDINATED ISSUES	Same trustee may be appointed to both senior & junior issues to ensure effective subordination Common to achieve subordination contractually through T&Cs of issue creating ‘contingent debt’	Need different agents for senior & junior issues to ensure effective subordination
ADVANTAGES TO THE BH’s “suing”	In event of default The trustee is looking after the Bondholder If BHs have a trustee they will have someone to professionally deal with the default in their behalf. The trustee can bring an action on behalf of all the BH’s and this may be cheaper, quicker and easier from the BH point of view. But if the Trustee doesn’t want to sue, then there is a problem. The issuer has to pay BH through the trustee after defaulting. This prevents a powerful bondholder form making a deal at the expense of small BHs. Insolvency The individual BH is an unsecured creditor and very vulnerable on insolvency. A Trustee has better change of negotiating a resolution or moratorium with creditors and this will be to the BH’s benefit. Issuer’s view For the issuer it is sensible to have a trustee as it works as a “firewall” to protect the borrower from silly law suits as the Trustee is an experienced entity that can filter these. The trustee can chair meetings and make recommendations to BH when collective decisions are needed awn will be able to take decisions as to changing the terms of the bond.
ADVANTAGE TO THE ISSUER	Where an Event of Default occurs Only a trustee can act so the issuer is dealing with a sole professional. A trustee is more likely to deal with things in a calm manner and pose less of a headache for the issuer than lots of less sophisticated, individual bondholders. Trustee may have power to waive events of default (check the deed) Protect issuer from rogue BHs Trustee may be able to agree minor amendments to the T&Cs of a bond without calling a meeting of BH. This makes it more flexible for the issuer Not recognised in certain Civil Law jurisdictions.	Cheaper: trustees must be paid fees throughout the lifetime of the trust and the issuer must also pay fees of trustee’s lawyers (“en plus” pay a Fiscal Agent). Institutions (banks) will compete to be fiscal agents (prestigious) and may even do it for free if they get another role in the bond issue. Recognised in civil and common law jurisdictions.

On the facts, it looks like a fiscal agent will be more appropriate as Tom wants to save costs & doesn’t have any subordination or any security.
However, an advantage of having a trustee is that both the BHs & the issuer can deal through a middle man. See p13 notes for advantages for BH & Issuer
However, this will cause more cost for Tom which he want to avoid (reason in table above)
Christine is incorrect. You can’t have both as they are legally conflicting.
- Trustee takes security over & holds legal title to chose in action = covenant to pay. Responsible for BHs
- Fiscal agent doesn’t take legal title to anything and is responsible for Issuer.

Managers and Lead Managers ¿Will the managers be liable to Alexandria if something goes wrong? If so, how? Is there any other agreement which will indirectly affect this?

¿WHO?	Financial institutions e.g. investment banks
ROLE OF LEAD MANAGER	Responsible for arranging bond issue & managing issue process as soon as it receives mandate Advises issuer on structure, timing & pricing, & takes credit for success & responsibility for failure of issue to sell. If issue is to be listed, lead manager will usually be ‘sponsor’ required by UKLA to provide confirmations (e.g., of compliance with the LRs) for listing. Bond issues of sovereign, supranational or frequent issuers are sometimes identified with reference to lead manager. “Recruits” a number of ‘co-managers’ to join him in a ‘syndicate’.
ROLE OF MANAGERS (SYNDICATE)	Syndicate = distribution network for issue, using contacts & knowledge of market to find investors (‘book building’). In most bond issues on London market, syndicate agree with issuer to take all bonds, even if they can’t find investors. Gives issuer reassurance of knowing the exact amount of the funds it will receive. For a fee, syndicate will buy unsold bonds (may sell such bonds in 2^o market at a lower price in order to clear their books, or they may retain bonds in hope that demand for them increases & they make a profit on a sale). Syndicate names appear on prospectus in order of contribution to amount of issue they’ve sold, alphabetical if = In some US issues & some high-yield UK issues, syndicate will only have to use ‘reasonable endeavours’ to sell securities, & a separate group of banks will ‘underwrite’ any unsold bonds to give issuer certainty of funds.
LIABILITY	Jointly and Severally liable to the issuer if anything goes wrong. This will be stated in the Subscription Agreement. The degree of liability each is exposed to can be varied by agreement, In this the managers will agree to what extent each manager is liable under the subscription agreement. They will agree to indemnify each other up to a certain level. This level will vary from agreement to agreement. The issuer will make Warranties and Representations to each manager so that they can assess the risk they’re taking (that bonds will not sell/fall in value before selling them on 2^nd market) The issuer’s Warranties and Representations will include facts e.g. all material supplied to managers true and accurate in all material respects and some legal (issuer validly incorporated and able to offer bonds etc.)

ROLE OF LEAD MANAGER

Responsible for arranging bond issue & managing issue process as soon as it receives mandate
Advises issuer on structure, timing & pricing, & takes credit for success & responsibility for failure of issue to sell.
If issue is to be listed, lead manager will usually be ‘sponsor’ required by UKLA to provide confirmations (e.g., of compliance with the LRs) for listing.

Bond issues of sovereign, supranational or frequent issuers are sometimes identified with reference to lead manager.
“Recruits” a number of ‘co-managers’ to join him in a ‘syndicate’.

ROLE OF MANAGERS (SYNDICATE)

Syndicate = distribution network for issue, using contacts & knowledge of market to find investors (‘book building’).
In most bond issues on London market, syndicate agree with issuer to take all bonds, even if they can’t find investors.
- Gives issuer reassurance of knowing the exact amount of the funds it will receive.
For a fee, syndicate will buy unsold bonds (may sell such bonds in 2^o market at a lower price in order to clear their books, or they may retain bonds in hope that demand for them increases & they make a profit on a sale).
Syndicate names appear on prospectus in order of contribution to amount of issue they’ve sold, alphabetical if =
In some US issues & some high-yield UK issues, syndicate will only have to use ‘reasonable endeavours’ to sell securities, & a separate group of banks will ‘underwrite’ any unsold bonds to give issuer certainty of funds.

LIABILITY

Jointly and Severally liable to the issuer if anything goes wrong. This will be stated in the Subscription Agreement.
The degree of liability each is exposed to can be varied by agreement,
- In this the managers will agree to what extent each manager is liable under the subscription agreement. They will agree to indemnify each other up to a certain level. This level will vary from agreement to agreement.
The issuer will make Warranties and Representations to each manager so that they can assess the risk they’re taking (that bonds will not sell/fall in value before selling them on 2^nd market)
The issuer’s Warranties and Representations will include facts e.g. all material supplied to managers true and accurate in all material respects and some legal (issuer validly incorporated and able to offer bonds etc.)

Warranties and Representations. ¿To whom will Alexandria (the issuer) make representations and warranties? Why?

Reps & Wars in subscription agreement given by issuer to each manager
This is done because managers are middle men trying to sell bonds on. Therefore they need to know the info the issuer is telling them is true & accurate when they are pitching to potential investors. They want to make sure there is a sensible amount of disclosure made.
Also they need to know it’s worth to sign up in the 1^st place. Lessens risk.
Managers want the reps & wars as they will underwrite whole amount before they sell one. Therefore window of great risk which they need to mitigate.

Clearing Systems

Debt Securities: Key Documents:

Subscription Agreement + Prospectus/Listing Particulars (Similar to Facilities Agreement)(See WS(9))
Trust Deed or Fiscal Agency Agreement (Between Issuer and Fiscal Agent)
Paying Agency Agreement (If trust is used, need principal Paying Agent)
T&Cs (e.g. offer is made in certain jurisdictions, interest paid, negative pledge, tax, events of default)

	Definitive Bearer Bonds	Definitive register bonds	Global Note
Transferral “old System”	Transferred by physical delivery	By a change to the register – need instrument of transfer and original bond certificate to be filed	Through clearing systems (the bonds are fungible) using 2 accounts & instruction to the clearer
How is Entitlement proved	They are in Paper form. Prove ownership by presentation on maturity (or on sale). Handing over the bond passes ownership. Tear-off coupons are used to claim interests. Not used any more due to risk of loss, theft & expensive to print loads (admin costs) See below Modern System	In the form of a Certificate with name on it. Handing over the certificate does not pass ownership. Ownership passes by entering name on register. Not used anymore due to risk of loss, theft & expensive (costs of registrar) See below ...

Transferral

“old System”

Transferred by physical delivery

By a change to the register – need instrument of transfer and original bond certificate to be filed

Through clearing systems (the bonds are fungible) using 2 accounts & instruction to the clearer

How is Entitlement proved

They are in Paper form. Prove ownership by presentation on maturity (or on sale). Handing over the bond passes ownership. Tear-off coupons are used to claim interests. Not used any more due to risk of loss, theft & expensive to print loads (admin costs) See below Modern System

In the form of a Certificate with name on it. Handing over the certificate does not pass ownership. Ownership passes by entering name on register. Not used anymore due to risk of loss, theft & expensive (costs of registrar) See below ...

#10298 - Chosing Trustee V Fiscal Agent Managers Clearing Systems Ws 8 Task 2 - Finance and Capital Markets

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