The trustee plays a central role in a wide range of finance transactions, acting in varying capacities as note trustee, security trustee or otherwise. While the global financial crisis highlighted the importance of the trustee's role in these transactions, particularly in relation to near default situations, covenant re-negotiation and enforcement actions, the post-crisis landscape continues to reveal issues that are crucial to the trustee's role. Reflecting an improved market landscape, 2014 is proving to be a busy time for trustees, with new-money deals (on the plain debt, high yield and securitisation side), as well as restructurings, amendments, consent solicitations and liability management issues in existing deals. In addition, trustees continue to have to react to rating agency actions.
Our expert trustee counsel, Simon Porter, head of the London Corporate Trust practice, and Adam Farlow, expert on New York law-governed deals, consider some of the current hot topics for trustees in today's market.
Stable nature of trustee business
Although the global financial crisis caused high turnover in bankers and lawyers, the trustee community has remained fairly constant, and, with experienced counsel's advice, the experience that skilled trustees can bring both to new deals and existing, is proving to be invaluable. Trustees have often had to deal with the results of poor drafting and are now well placed to identify and pre-empt problems that might arise on new transactions. Equally, other than the trustees themselves, many of the parties advising on recent consent solicitations have not been through the process before, and they are not always aware of the range of tricky issues that can come up. By way of example, we have recently worked with our colleagues in the Netherlands to ensure that an exchange offer did not cause the SPV issuer to have to apply for a Dutch Banking Act licence. Trustees have even been asked to draft consent solicitation statements in the absence of experienced legal advisors to issuers, which is not generally a recommended solution!
There has been a tendency (despite (or perhaps because of) the multiple service providers involved in the transaction) for the note or security trustee to be inadvertently given additional roles. It is important to look out for this when reviewing transaction documents - both to preserve the traditional trustee role (as representative of the Noteholders), and to avoid situations where inexperienced Arranger counsel may try to burden the trustee with additional roles (such as data trustee, calculation agent, or other form of determination agent) or fix the trustee with the responsibility of appointing additional or substitute parties, such as a standby servicer.
There is also a question mark over which transaction party is responsible for the additional reporting obligations that have been introduced by regulators seeking to introduce greater transparency into structured finance transactions. There is a temptation (perhaps on the part of the other transaction parties) to make the trustee the responsible party for gathering and providing this information to regulators. Inadvertent expansions of the role of the trustee due to poor drafting, or where there has been a lack of commercial agreement over the precise role of the trustee (or simply where, from day one, there is a broader list of roles that transaction parties expect the trustee to fulfil) demonstrate a lack of clear forethought about the role of the trustee when deal-structuring. Transaction documentation should be clearly drafted (and the trustee assisted by counsel in its detailed review of the transaction documentation) from the outset.
Know Your Customer
To eliminate any surprises, whatever the role of the trustee in a transaction, it is crucial that know-your-customer (KYC) checks are completed at an early stage. This is as important on day one of the transaction as it is when any new transaction parties are added through the life of the deal. By way of example, it often happens (particularly in high yield deals) that it is commercially agreed that in later stages of the transaction (perhaps even years post-closing) new guarantors that have not been subject to KYC checks are sought to be added. Whilst in the vast majority of cases, this will cause no issue in practice, documentation will need to reflect the fact that the appointment of the additional guarantor is subject to the necessary KYC checks being satisfied.
Given the increasingly globalised nature of the transactions on which modern trustees advise, a trustee is often in a situation where it is required to take (and possibly, ultimately, enforce) security in multiple jurisdictions. Baker & McKenzie's extensive global network means that, either at the outset of a transaction or when things go wrong, we are well-placed to identify and deal with issues in cross-border deals under one roof.
Our Banking and Dispute Resolution teams have recently been involved in the litigation relating to theStabilus group of companies, which highlighted several issues for trustees (not least of which were the difficulties involved when effectively one party acted in several roles, including security trustee, senior facility agent and mezzanine facility agent - and how to manage those - often competing - roles), but also brought to light the difficulties for trustees in managing different sets of local legal advice (which can arise where the transaction documentation is English law governed, but the parties, and/or the listing location are foreign).
The recent issue of the sanctions imposed against certain Russian individuals and entities has highlighted the important issue of "walkaway rights" for trustees and the fundamental tension between the requirement to maintain a trustee at all times and the commercial reality that a trustee may no longer be able to continue to act. The risk of sanctions imposed against a single transaction party could taint an entire transaction. It is therefore crucial to check when structuring a deal that there are provisions in the transaction documents allowing the trustee to walkaway if there are any changes in parties or a change in law or regulation that would make the trustee's role in the transaction inappropriate. While it may be difficult for a trustee to obtain advice in such a situation, it would help if there are very explicit walkaway rights set out in the transaction documentation. In addition, retirement provisions would have to provide for a replacement trustee in these situations - but the questions remain as to who could act in these circumstances, and who could advise them?
Enforcement action… and inaction
Tensions remain between different classes of Noteholder over the decision whether to enforce or accelerate in a transaction in which an event of default has occurred. With as few as 20% of the Noteholders being required to direct the trustee to accelerate, there can be competing interests within a transaction, particularly where some Noteholders who invested at par at the very beginning of a transaction (they don't want to be forced into an exit) have a conflict with other Noteholders who bought at a significant discount and would be happy to receive a quick exit at a premium to their distressed purchase price. While most issues can be resolved by the trustee using its discretion and taking appropriate legal advice, occasionally, where disputes arise between different classes of noteholder, court directions (as sought in the recent case of US Bank Trustees Ltd v Titan Europe 2007-1  EWHC 1189) may be helpful in reaching the desired outcome for the trustee.
Often, the trustee's duty to act will be clear-cut if the requisite percentage directs it to do so. Most documentation will provide that a trustee is not obliged to act unless indemnified and or pre-funded to its satisfaction. Agreeing the indemnity can be a challenge in both an acceleration, but particularly in an enforcement scenario. Insisting on an indemnity or even being paid up-front will be important in these situations (although sometimes the trustee can have its expenses paid by the Originator) - the trustee cannot be put in the position that its own funds are put at risk. Noteholders will always look to limit their exposure under an indemnity by seeking monetary caps on their liability or seeking to indemnify the trustee only on a several basis - which is rarely going to be acceptable to a trustee. All parties need to be mindful of the guidance in Concord Trust v Law Debenture Trust Corporation plc UKHL 27 to the effect that the risk against which a trustee seeks indemnification must be more than a merely fanciful one but that the quantum should reflect the worst case outcome.
In cases where the indemnity cannot be agreed or where there has been difficulty in securing the trustees' fees/expenses, can the trustee just stop acting, and could it be criticised for doing nothing? Inaction can often be as bad as taking the wrong action. While there are certain steps that a trustee would be required to take (to fulfil its fiduciary duty to the Noteholders), the transaction parties will inevitably seek to exert pressure on the trustee to take the actions they want. A recent US case related to the Lehman litigation considered the recoverability of "professional fees" in a downside scenario. As the court held that such fees were not recoverable based on the relevant facts, the decision may imply that there is an impact on the trustee's ability to recover its fees in a bankruptcy scenario. It will be helpful for trustee counsel to focus on the issue of disbursements and expenses in the context of this recent decision.