What Is a Bond Trustee?
A bond trustee is a financial institution that is granted trust powers, such as a commercial bank or trust company. This entity, in turn, has a fiduciary duty to the bond issuer to enforce the terms of a bond indenture. A trustee sees that bond interest payments and principal repayments are made as scheduled, and protects the interests of the bondholders if the issuer defaults.
- When a corporate bond is issued, the issuer often hires a third-party bond trustee, usually a bank or trust company, to represent investors who will buy the bond.
- In particular, the bond trustee ensures that the issuer maintains a fiduciary duty to its bondholders and that all terms and covenants spelled out in the bond issue are enforced.
- The agreement entered into by the issuer, and the trustee is referred to as the trust indenture.
Understanding Bond Trustees
A bond issuer is one that sells bonds to investors or lenders to raise money in the short or long term. The issuer brings together a finance team responsible for underwriting and selling the bonds. One of the members of the finance team is a bond trustee.
A bond trustee is hired by a bond issuer and oversees the implementation of a bond or trust indenture, which is a contract between a bond issuer and a bondholder. The trustee has a fiduciary responsibility to act on behalf of the issuer, rather than in its own interests. The trustee’s name and contact information are included in the document, which highlights the terms and conditions that the issuer, lender, and trustee must adhere to during the life of the bond. The section of the indenture which lists the bond trustee's role is important as it gives a clear indication of how unforeseen incidents will be dealt with. For example, if a conflict of interest comes up involving the trustee's role as a fiduciary, in certain trust indentures, the issue must be resolved within 90 days, otherwise, a new trustee will be appointed.
Roles and Responsibilities of a Bond Trustee
The bond trustee is responsible for the registration, transfer, and payment of bonds. It is required to maintain separate accounts, monitor bond document requirements, and provide monthly statements. It also approves amendments to some documents and acts on behalf of the bondholders if the borrower or issuer violates certain bond documents. A bond trustee must have adequate staff and systems to efficiently perform its duties and comply with the various federal, state, and bond issue requirements. In addition, the trustee is generally indemnified against all liabilities of the issuer and all actions and proceedings undertaken, except in the case of a breach of the deed or a fraud. One reason an issuer may hire a bond trustee is to reduce the general conflict of interests between bondholders and shareholders.
Not all types of bond issuance require the use of a trustee. For most senior unsecured bond issuance there is no obligation to have a trustee. In this case, the issuer has the option to use a fiscal agent or paying agent. Trustees are usually used for bonds in the wholesale market.