This post consists of thoughts on the role of indentured trustees and bankruptcy. To lighten up a heavy and technical subject matter, we’ve structured it like a musical in four short acts, each headlined by the title of a familiar song.
So, with both gratitude and apologies to Pete Seeger, the Beatles, the Clash and Lin-Manuel Miranda, let’s dive in.
“Where have all the bankruptcies gone?”
At the start of the pandemic, we expected an increase in distress and defaults in the municipal and corporate debt markets. We were both right and wrong. There have been disruptions and strains that have made life difficult for many borrowers. But the massive wave of bankruptcies and restructurings did not materialize as expected, largely because of massive injections of cash from the federal tax authorities.
Two years later, these pressures on borrowers persist. The economic cycle has not been abrogated and many companies that have received financial support still need to be restructured. Judgment day has been postponed, not cancelled.
When bond issuers choose to restructure under the protection of a bankruptcy filing, the trustee has several decisions to make. These decisions will reverberate and make a material difference not just for bondholders, but for the entire company.
“Should I stay or should I go?”
Among the first decisions to be made when filing for bankruptcy (or sooner), the trustee must determine whether he can remain in this capacity. Under the Trust Indenture Act, a trustee must resign soon after a default if they perform conflicting duties. This may include acting as an indentured trustee for competing tranches of debt or being a lender in its corporate capacity. Deciding early on whether he can and should stay on as trustee is key to ensuring bondholders have adequate representation throughout bankruptcy.
If the answer is that the trustee must leave, the next question is who should step in? The outgoing trustee generally has some influence on the choice of his successor. Investors and their advisors are increasingly making their preferences known. It is important that the chosen successor be qualified under the trust deed, with the skills and resources to fully participate in the bankruptcy process.
The indenture trustee is responsible for representing the interests of bondholders. The best way to do this is to talk to them, help them get together (if they haven’t already) and work closely with cardholders to formulate and implement a strategy to maximize recoveries. .
The trust deed generally gives the holders the power to run the trustee, assuming they have the required number and provide satisfactory indemnity. It is generally in the interest of the holders and the fiduciary that most bonds are structured around a strategy. For this, the holders, the fiduciary and their professionals must try to reach a consensus on the best course of action. A good administrator will work hard to help build this consensus, while protecting the rights and interests of holders who are not part of the working group.
It’s more complicated than it seems. The administrator must both coordinate with the working group and keep nonparticipating holders informed of developments, all without piecemeal disclosure of material nonpublic information. There are many ways to be wrong; it is important that the trusted agent in charge has the expertise and judgment necessary to meet the challenge.
“What else can I do?”
The contract trustee’s job does not end once a plan is confirmed and comes into effect. Old bonds will usually be surrendered and disposed of, hopefully in exchange for good value. The trustee will be a necessary partner in effecting this exchange, coordinating with the debtor, claims agent, exchange agent, Depository Trust Company (DTC) and others. And the Trustee will need to continue to communicate with Holders until the Effective Date.
The trustee can often be approached with new roles, such as liquidation agent, curator for new bonds, or distribution agent. The trustee is intimately familiar with the reorganization plan and post-bankruptcy capital structure. He should therefore be a good candidate to take on the resulting service roles for a smooth transition.
The UMB Distressed Debt team works to meet the general needs of borrowers and bondholders, navigate trouble spots as they arise, and help protect bondholder value. Find out how we can support default and training needsWhere Contact us be put in touch with a specialist in the recovery of debts in difficulty.