What Is a Paying Agent?
A paying agent—also known as a "disbursing agent"—is one who accepts payments from the issuer of a security and then distributes the funds to holders of the security.
Paying Agent Explained
Paying agents are usually a corporate trust department of a bank or trust company that are designated to make dividend, coupon, and principal payments to a security holder on behalf of the issuer. When paying agents are used for stocks—the agent receives dividends, which they then disburse to stockholders. For bonds, paying agents receive coupon payments, which they then give to bondholders. In a bond issue, the bond’s indenture will usually name a paying agent to be responsible for making interest and principal payments. A paying agent acts as an intermediary in these transactions, and receives a fee for their services.
In bond issues where there is more than one jurisdiction, there will be more than one paying agent, one of which will perform a coordinating role. If it is not a trustee deal, the coordinating agent role will be performed by the fiscal agent. If it is a trustee deal, the agent will be called the "principal paying agent."
- A paying agent accepts payments from the issuer of a security and then distributes these funds to holders of the security.
- Although paying agents work with all securities, including stocks, they are widely used with debt instruments, like bonds.
- The paying agent's role is co-mingled with other kinds of agents in the complex process of bringing a new issue to market.
Paying Agents' Other Services
Specialty firms like investment banks, which act as paying agents, can provide related services that are broader than a straightforward disbursal of funds, including but not limited to:
Paying agencies that are investment banks also can help link their clients with the shareholders of a target company in the event of a cash distribution of proceeds for an acquisition or leveraged buyout (LBO).
Adjunct Agent Roles
In the debt capital markets, a wide range of administrative roles, in addition to the paying agent's, help to complete the transactions involved with bringing new issues to market.
- Agent Bank. This role is required when there is a floating rate of interest. The agent bank simply involves calculating the coupon payments relative to each interest period based on the formula(e) set out in the terms and conditions of the securities.
- Calculation Agent. This role is required when there are more complicated coupon payments than floating interest rates. For instance, if index-linked or derivative-based calculations are needed, a calculation agent at the agent bank performs this task.
- Registrar. The registrar keeps records of the holders of registered securities. Often, this role is performed by the same party that is performing the custodian or paying agent roles. Other parties, called transfer agents, may assist with this process in other jurisdictions.
- Custodian. If the issue is secured, the assets used as underlying security may include debt instruments. This is a particularly frequent scenario in repackagings and other structured finance transactions. In this case, a custodian holds the assets in an account on behalf of the issuer.
- Listing Agent. If the debt instruments will be listed on a stock exchange, the exchange may specify that there must be a listing agent. The listing agent acts as a liaison between the issuer and the stock exchange. They will prepare all of the material to submit to the exchange, including the prospectus.
- Legal Advisers. If the issue involves a loan syndicate, then the issuer and the underwriter—and where appropriate, the trustee—will each appoint their own legal advisers. If the issue involves an overseas jurisdiction, overseas lawyers are usually appointed to advise on local laws, selling restrictions, and regulations.
A Paying-Agent Agreement
There are numerous formats for paying-agent agreements. Banks generally have their own standard agreements, as does the Securities and Exchange Commission (SEC). A paying-agent agreement states the date of the agreement and the parties involved, along with the physical addresses, if applicable, where the principal amount will be kept. These agreements generally cite details of the offering—such as, "XYZ municipal government is offering $200,000,000 in floating-rate notes, due August 10, 2019." The agreement could state that payment of principal and interest on the notes would be guaranteed by a guarantor or a trustee. The paying-agent agreement also describes the exact timing and method (when and how) the paying agent will deliver interest on the notes or other issued securities.