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Trustees and investors at loggerheads on indemnities

10 Jun 2007

When trustees have to go into action — for example, to deal with a default — they require an indemnity from noteholders in case something goes wrong. Many can see the attraction of standardising these
indemnities — but getting all the different parties to agree may be very difficult.

Stephen Norton,
Law Debenture Trust:
ideally there should
be a standard form
of trustee indemnity

Trustees are now looking into an initiative by the European High Yield Association to standardise the indemnities trustees require when acting on the instruction of noteholders.

Although the EHYA approached the Association of Corporate Trustees (TACT) in the UK to discuss such a move within the high yield bond market, the industry association is looking at the potential for implementation across asset classes, including the ABS market.

"The EHYA said that in an ideal world there would be a standard form of trustee indemnity that would be agreed within the market and would be an addendum or supplement to the standard form of trust deed," says Stephen Norton, director of marketing at Law Debenture Trust in London and president of TACT. "That would mean that when noteholders instructed the trustee to declare an event of default and commence enforcement action, and time was of the essence, there would be less time spent negotiating an indemnity."

While similar initiatives have been suggested in the past, issuers, who pay trustee fees, have seen little need for such a supplement, since in their eyes, default is a remote possibility.

But trustees and bondholders are also far apart on the matter.

"We would want any indemnity to be as wide ranging as possible, to cover all eventualities so that every action we would take would be appropriately indemnified," says Norton, "whereas the party giving the indemnity would want it to be as narrow as possible."

He says that even if the two sides were able to agree on the language describing the range of eventualities, the value of the indemnity would still need to be agreed upon. "We would want it open-ended rather than capped," says Norton. "They might propose giving us an indemnity for £1m, but that would be no good if we were approaching that amount when only, say, one third of the way through a case."

On top of this, the trustee would have to have faith that noteholders would make good on the indemnity. "The key issue is the quantum of the entity giving the indemnity," says Norton. "While we may have a very wide-ranging indemnity where all eventualities are covered and it is not capped, it’s not going to be that helpful if the company giving the indemnity is too insubstantial.

"You don’t want indemnities from all the different bondholders as that would be too complicated. You would want an indemnity from the biggest — and most substantial — bondholder."

Trustees say that, given the difficulties of resolving these issues and their lasting financial implications, support for the standard indemnity initiative, particularly from the parent banks of many corporate trust departments, is unlikely to be forthcoming.
10 Jun 2007