What is a security trustee?

A security trustee is a service that can be offered by an FCA Authorised firm, although the activity is not regulated by the FCA. Many debt investments, especially mini bond and loan note issues have a need for a firm to act as a security trustee. A security trustee is an independent entity that sits between the bond holders, (the investors) and the bond issuer, (the borrower). The security trustee’s primary responsibility is that of acting impartially, but representing the interests of the bond holders, especially if a bond issuer fails to meet an interest (coupon) payment.

Do any of the following question resonate with you?

  • Why are security trustees important?
  • What is the implication if a security trustee is not used in a debt investment?

Why is a security trustee important?

The firm acting as the security trustee has a charge over the lender’s assets, typically for the benefit of a group of investors (“Bondholders”). The security trustee creates and writes both the Security Trustee Agreement, and the fixed and floating charge (debenture) document. A fixed charge is a bond holder’s right to assets that typically don’t change, for example, real estate. A floating charge is a right to assets that can vary. Usually these are assets that are used for the operation of the business’ and included stock or cash. Once the debenture deed agreement has been created, the issuing firm signs it and it then is registered with Companies House. This locks in the Bondholder’s right to the assets.

If a bond issuer fails to meet the payment terms to Bondholders, laid out in the accompanying documentation, the security trustee has an obligation to act. The security trustee files a debenture on the lender’s assets. The security trustee will liquidate the company and its remaining assets and will then distribute the remaining assets fairly amongst the bond holders.

What would happen if a security trustee was not used in a debt transaction?

If a security trustee is not present in a debt transaction, and a bond issuer fails to meet the contracted coupon payments, it is very difficult for bond holders to get any of their invested money back. If payment obligations are not met, it would be necessary for each bond holder to independently engage in legal action against the issuer in search of compensation. The sheer number of law suits filed against the bond or loan note issuer would likely consume all the issuer’s remaining assets in legal costs.

A security trustee acts on behalf of all bond holders, issuing one debenture on the bond holder’s remaining assets. Therefore, only one charge is filed. Consequently, the issuer consumes very little of its remaining assets in legal fees. Following liquidation, the security trustee then distributes the remaining assets fairly amongst all lenders.

What if the bond issuer meets all payment obligations?

If the issuer meets the agreed payment obligations, the security trustee’s role is effectively redundant. This is the ideal scenario for both the lender and the debtor. The bond holders would wait for the bond to mature and if all monies are successfully released to all bond holders, i.e. the fixed sum plus interest, the contractual agreement is fulfilled, and the issue ends. The security trustee is not needed to be called into action.

Blue Water Capital is an FCA Authorised firm and offers the security trustee service. If you require any further information as to how Blue Water Capital can help your firm, get in touch.

If you would like to know how Blue Water Capital & Compliance can help you, please contact us at: freddie@bluewatercapital.co or call  +44 (0)121 725 1951

Please note this article does not constitute legal advice and should not be used as the basis for any business decision.