The security trustee represents the interests of the holders of notes (investors) and shall take over defined issuers’ obligations, such as the all-important agreement to pay, on behalf of the noteholders. In essence, the security trustee acts as an intermediary between the noteholders and the issuer. The security trustee is protecting the rights of the noteholders as set out in the trust deed and agreements.
In financial transactions such as securitisation, it is essential that the security trustee is both an experienced professional and an independent party, with the right of access to appropriate, and in possession of any relevant information with regards to the assets. This is to ensure that the trustee can monitor the note issuer’s compliance to its obligations as set forth in the trust deed. The trustee’s role is to reduce complications, as well as add value and comfort to the participants.
The Role of the Security Trustee
In its simplest form, a security trustee is the person or entity holding the various security interests created on trust for the secured creditors, such as banks or bondholders in a financial transaction, which can be a securitisation transaction or direct investment. The security trustee defends investor rights as well as enforcing security upon default. The trustee may accelerate the notes and take enforcement on behalf of the beneficiaries.
Equally, the nature of the trust structure means that acceleration by a single noteholder is prevented, protecting the entire transaction and preventing an individual noteholder from bringing down the structure.
The security trustee can assist in a number of different scenarios, whether it be a simple debenture transaction or structures set up to raise capital. Assuming the transaction goes to plan, the debtor discharges the debt, the trust is dissolved and the title of the assets is transferred back to the debtor. In case of a default, the Maltese Civil Code provides that the security trustee shall be legally entitled to liquidate the assets held on trust and distribute the proceeds to the creditors. The trustee is obliged to act reasonably and fairly in the enforcements of the rights of the security, and they will still owe a fiduciary duty to the beneficiaries of the security trust.
Advantages of a Security Trustee
The most obvious advantage of involving a security trustee is that it protects the rights of the noteholders. Essentially, the security trustee can prevent any uncoordinated actions which may prejudice the performance of the financial transaction. Furthermore, it can enable capital to be raised through investment from various creditors without having to grant separate security to each individual creditor, thus reducing costs and complexity as well as saving time. Each creditor has a financial interest in the trust rather than in the individual assets.
The flexibility of the provisions, which can be drafted into the trust deed (amongst other things), allows for changes in the trustee without affecting the validity of the trust or its continuity. Also, the trustee is empowered to enforce the security, even if other creditors directly sue the debtor. Significantly, security trustees are not liable for the obligations of other creditors, unless a specific agreement is reached between the parties.
Mandaris Trustees (Malta) Ltd., a fully licenced trustee company recognised under the Trusts and Trustees Act and an affiliate of Coprolin SCC plc, offers the possibility of tapping into the benefits of using a security trustee in commercial structures to unrelated issuers. Mandaris understands the complexity of structured finance transactions, having been involved in a number of securitisation transactions through its affiliated securitisation platform Coprolin. Our team has the experience and technical know-how to perform this type of niche financing and to offer step-by-step guidance to our clients.