Functions performed by a trustee
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Written by Atila on September 18, 2008 – 10:14 am
When debt is supplied by a single creditor, there is a one-to-one relationship between the lender and borrower. However, bond issues can have thousands of lenders, so a single voice is needed to represent bondholders.
This function is performed by a trustee, usually an institution such as a bank, which represents the bondholders and ensures that the terms of the indenture are being carried out.
The trustee is responsible for monitoring the issuer and for taking appropriate action if a covenant violation occurs. What constitutes appropriate action varies with the circumstances.
A trustee has the power to foreclose on an issue in default, which makes the full amount of principal and unpaid interest due and payable immediately.
However, insisting on immediate payment may result in bankruptcy and possibly large losses on the bonds. In such a case, the trustee may decide that the bondholders would be better served by giving the issuer a chance to work out its problems, which would avoid forcing the business into bankruptcy.
