UMB has been providing trust services to businesses for 75 years. As part of TIA, we have expanded our nationally recognized fiduciary and agency services to corporate and municipal markets. When we started 75 years ago, there were hundreds of banks that had corporate trust services. In recent decades, the industry has become more specialized and highly skilled, and fewer banks now have the necessary expertise in this area. UMB, on the other hand, is more committed to providing these institutional services. Our expertise has grown in recent years for specialized trust and asset-backed securities (ABS) services, including our recent appointment as the Approved Trustee of the Global Aircraft Trading System (GATS), a new aviation working group platform that facilitates the safe trading and financing of aircraft equipment. Bond trustee and agency services are essential to corporate and municipal markets. However, the role of a fiduciary or paying agent in the phases of a bond issue can often be unclear. Below, our Corporate Trust team answered frequently asked questions to explain UMB Bank`s responsibilities and the role we play as bond trustees or paying agents.
Funds are often not available to cover the costs and expenses incurred in executing a bond commitment. An undertaking trustee has no obligation to risk its own funds to take corrective action on behalf of bondholders. As a result, most debt instruments provide that the fees and expenses incurred by the bond trustee are paid out of the collections before the funds are paid to the bondholders. Bond trustees may also request satisfactory compensation on instruction from bondholders before risking their own funds. As we described above, a bond is a form of loan. When a bank issues a loan, it usually appoints one of its loan officers to monitor the borrower and their compliance with the loan agreement. When a company or government issues a bond, a bond trustee is often appointed for the same purposes. Ideally, a bond trustee is a financially sound financial institution that is likely to remain strong for the duration of the bond (usually up to thirty years). Not all types of bond issuance require the use of a trustee.
For most issuances of senior unsecured bonds, there is no obligation to have a trustee. In this case, the issuer has the option of appointing a tax agent or a paying agent. Trustees are typically used for bonds in the wholesale market. A contract trustee is not a lender. When UMB acts as a commitment trustee, we offer a service to the bond issuer and bondholders. As a commitment trustee, UMB itself is not likely to lose an investment because UMB did not make the investment. Rather, it is our duty to protect the rights of duty holders as set out in the obligations, escrow agreement and related documents. And even the obligation to protect bondholders is subject to the right of the trustee of the act to never risk its own funds in pursuit of measures to assist investors., The obligations of the issuer and trustee of bonds are set out in a contract called an escrow agreement (sometimes called a bond agreement). Typically, the bond trustee collects the funds to pay the interest and principal provided for on the bonds and receives financial and other regular reports from the issuer. If the issuer misses a payment or does not fully comply with its obligations under the escrow agreement, the trustee notifies the bondholders and, if necessary, enforces the bond obligations if the issuer is unable or unwilling to meet.
It is very common for investors who hold the majority of defaulted bonds to get together and work with the trustee, often directing the trustee`s shares on behalf of all bondholders. Engagement trustees should be large financial firms that are likely to remain in place to protect the interests of investors throughout the life of the bond. In addition, once appointed, a bond trustee may not withdraw from this role during the term of the Notes, unless a qualified alternate trustee is appointed. For bond issues where there is more than one jurisdiction, there will be more than one paying agent, one of whom will play a coordinating role. If it is not a trustee, the role of coordinating agent is assumed by the tax officer. If it is a fiduciary transaction, the agent is called the „primary payer“. During the Great Depression, many people who owned bonds in default had no protection and lost some or all of their investment. Congress and the Securities and Exchange Commission (SEC) have recognized that bond investors can struggle to protect their rights if there is no deed trustee. As Congress has found, bond investors are often geographically dispersed and may not even know who the other bondholders are.
An investor who holds a small percentage of outstanding bonds may find that the cost of protecting their rights is disproportionate to be worthwhile. Congress passed the Trust Indenture Act of 1939‡ (TIA), which is administered by the SEC. The TIA requires corporate bond issuers to appoint commitment trustees for most bond issues over $10 million. Issuers of government and municipal bonds may also appoint trustees for debt securities, but are not required to do so under the IAA. Certain bonds exempted from the Securities Act of 1933 are also exempt from the requirement to appoint a trustee of engagement. There are many formats for paying agent contracts. Banks typically have their own standard arrangements, as does the Securities and Exchange Commission (SEC). A paying agent contract shall specify the date of the agreement and the parties involved and, where applicable, the physical addresses at which the principal amount will be withheld. These agreements typically cite details of the offer, such as: „The XYZ City Government is offering $200,000,000 in floating rate bonds issued on July 10. August 2019. The agreement could stipulate that the payment of principal and interest on the bonds is guaranteed by a guarantor or trustee.
The paying agent contract also describes the exact time and method (when and how) the paying agent provides interest on the bonds or other securities issued. .