Select an Indenture Trustee for Today - and Tomorrow
Select an Indenture Trustee for Today - and Tomorrow
By: Wilmington Trust

Issuers of debt securities require an indenture trustee to assume fiduciary duties and handle crucial administrative responsibilities such as monitoring interest payments, monitoring redemptions, and communicating with their investors. Selecting a quality corporate trustee has become an increasingly complex task as a result of ongoing consolidation in the financial services industry.

Industry consolidation affects indenture trustees in one of two ways. A corporate trust department may be sold to another institution, something that is occurring with increasing frequency among money center institutions. Alternatively, the parent company of the company with the trust department may be acquired, resulting in new management for the trustee. At the very least, an issuer may end up with a trustee very different from the one its management team and advisors selected.

Does it matter?
Yes. Mergers and acquisitions can disrupt long-term relationships between corporations and their indenture trustees, which can, in turn, result in decreased service levels. These problems often result from staffing changes and/or system integration problems.

Some financial firms may have little interest in or commitment to the corporate trust business that they acquire. In such instances, an acquired corporate trust department may be starved of resources or sold to yet another institution, resulting in further upheaval.

Serious indenture trustee errors reflect poorly on the corporate issuer. In addition, these mishaps can tarnish the reputation of the advisor who recommended the trustee. Therefore, attorneys, investment bankers, and other interested parties should scrutinize a trustee before recommending one to a client.

Reducing the risks
In order to avoid merger and acquisition-related disruptions, issuers and their advisors should investigate whether a corporate trust department or its parent company is likely to be acquired by another financial services institution.

Though it is impossible to know with certainty whether a trust department or its parent will be sold in the near or distant future, asking strategic questions can help to minimize the likelihood of selecting an acquisition target to serve as trustee.

Questions to ask
Determining the potential for a merger or acquisition involving the corporate trust department or its parent company is only the first part of effective due diligence. If a change of management does not seem likely, it may be appropriate to ask a prospective indenture trustee about issues such as conflicts of interest, personnel tenure, client retention rates, and flexibility.

Despite ongoing consolidation within the financial services industry, corporations should be able to rely upon continuity of relationships and excellent personal service from their indenture trustees. Determining whether a trust provider will be involved in a merger and asking about issues such as independence and client retention can help to ensure that they are engaging providers that will be able to meet their needs now and in the future.

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.

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