In the face of declining oil prices and its resultant effects on Nigeria’s foreign reserves, exchange rate and interest rates, acute uncertainties persist in the debt market. These economic uncertainties have forced financial institutions to rethink terms on which new and existing facilities are granted to firms in various sectors, says Ifeoma Udom, managing director, Vetiva Trustees Limited, in this interview with Hope Moses-Ashike. She also discusses how the security trustee in debt financing structures can help make the path towards change management between banks, their lending counterparties and borrower institutions less bumpy and contentious. Excerpt:
How do we understand the place of security trustee in the debt capital market? Essentially, who is the security trustee and what is its role in debt financing?
Traditionally, a Security Trustee is normally appointed when lenders or financiers are extending financing to a borrower company in the case of syndicated lending, or multiple financing arrangements from more than one lender as is the case in consortium lending deals. Normally, in such arrangements, the terms and conditions of the financing of each lending institution may differ, except in terms of the common security. In this conventional scenario, a security trustee is appointed, whose role it is to create and hold the security in place, on behalf of all the lenders until the debt is fully paid off. In the event of a default on the financing terms, the security trustee assumes the responsibility for enforcing the security should the need arise.
Essentially, the point is that the law recognises the possibility of separating the function of the creditor from the security interest holder, thus helping to create stability with regards to the security irrespective of how frequently lenders come on board or exit the lending arrangement.
Why would the banks and borrowers want to bring in a third party into their deal? Why can’t the banks just hold title to the collateral?
In terms of cost efficiency from the borrower’s perspective, the primary benefit of this is the fact that the cost of perfecting and releasing the security is incurred only upon the set up and expiration of the security trust arrangement, irrespective of how often lenders enter and exit the transaction. In addition, a security trust arrangement enables a company create a senior beneficial interest and a subordinated beneficial interest in the same set of assets.
Accordingly, a proactive and forward-looking company would want to set up a trust structure and have the security trustee in place from the onset of the very first debt facility, thus saving it the cost and hassle associated with restructuring down the line when other banks are being brought onto the deal.
From the lenders’ perspective, a security trustee’s presence on the deal brings about flexibility that allows individual lenders exit, sell down or assign their interest to incoming lenders without affecting other lenders on the transaction and with minimal documentation. The lending parties also find comfort in the fact that the security trustee, as an unbiased umpire, takes on the responsibility of ensuring that the security is properly created and kept in place and the interest of all the lending parties are protected in accordance with the terms of the relevant Security Deed.
There appears to be major upsides to appointing security trustees, but are there any risks to using this structure?
Clearly, this is one situation where the advantages far outweigh the disadvantages. However, where the Trust Deed, Intercreditor Agreements and other facility documents are not appropriately drafted to envisage future possible scenarios, situations can occur where ambiguities in the agreement will leave the Trustee without clear direction as to what action to take, thus exposing the Trustee and the transaction to the risk of litigation. This makes the need for use of knowledgeable and well trained trust specialists, all the more pertinent to mitigate and, where possible, rule out the possibility.
We make it a point of duty from the onset to ensure that the parties during the documentation stage focus on likely and less likely scenarios and bargaining positions in the event of business expansion, debt restructuring and other possible future events. As finance documents become more complex and intricate, it is important to ensure that there is a security trustee that can effectively and timeously review and add value to the draft finance documents from the perspective of the security trustee to ensure total clarity in the event of all possible outcomes in the future.
At what point should a trustee be brought in on a given lending transaction?
Generally speaking, the Security Trustee may be brought in on the transaction at any point before the release of the Security. In times past, this was usually done when a multi-debt arrangement was being contemplated. However, since, as I have tried to explain earlier, trust structures are a useful way to plan for the long-term future of a business, it would be highly cost- and time- efficient for the security trust arrangement to be put in place from the very onset. It may also be kept in place for so long as the Company intends to use the assets or pool of assets as security.
Accordingly, a company may choose to put in place a security trust arrangement at the point where it is about to undertake a credit exposure to a single lender in anticipation of business expansion involving future lending against the same asset or set of assets. In the same vein, where all existing loans have been paid off, it may be wise for a company to choose to continue to have a security trust in place in anticipation of a fresh round of debt financing. This decision should however be based on a cost/benefit analysis in the light of the company’s business expansion plans using debt financing.
Giving the changing terrain in the debt capital market, what value addition do Security Trustees offer the banks and their clients?
There is flexibility in the structure, as it is relatively easy for counterparty lenders to enter and exit the syndication without significantly altering the structure of the transactions. Also, where properly set up (i.e. where the security trust is in place at the beginning of the transaction) there are cost-saving benefits to be reaped in the long run.
In addition, parties to syndicated lending arrangements are with time, becoming more aware of the need to have a dedicated party whose duty it is to ensure the safe custody of the security for the benefit of the Lenders throughout the life of the transaction and that is the core function of the Security Trustee.
Furthermore, the independence of the Security Trustee is an added advantage both for the lenders and the borrower that is where the Security Trustee is a separate and independent party from lenders.
In a typical financing deal, what is the process of setting up a trust structure? Who engages the Security Trustee?
Technically, the Security Trustee holds the security for the benefit of the lenders and accordingly is the agent of the lenders. On the other hand, the company has an interest in the party that hold the security as it is entitled to the reversionary interest in the assets. Accordingly, in practice, the Security Trustee may be approached directly by the lenders or by the borrower with the consent of the lenders or proposed lenders in place at the time of setting up the Trust.
Also, as most other costs of the financing, security trustee’s costs are borne by the borrower and accordingly the negotiation is usually undertaken with the borrower or the lender as agent for the borrower.
Once the Ttrustee is formally appointed, it commences acting with respect to the security. The relationship is, however, primarily governed by the Security Deed which comprehensively states the terms, conditions, duties and liabilities of the parties as regards the security.
Are there any other finance structures that would require a corporate trustee?
The list of transactions and structures to which a corporate trustee can be of significant value is endless. Essentially, a corporate trustee’s role is invaluable in any scenario where there are several interests to protect in respect of a single asset or pool of assets or where the transaction, when structured any other way, would result in significant expense in the transfer of title in the underlying assets from one party to another either simultaneously or over a period of time. For instance, on project finance transactions; management or leveraged buy outs, note issuance deals (depending on the structure and number of investors involved), the role of the Trustee would be central to ensuring a smooth-sailing transaction from start to finish.
In addition, giving the current economic situation in the country, one would expect the prevalence of Public-Private Partnerships to increase both at the state and federal levels. Here again, the role of the corporate trustee would be of significant value.
Would the set-up process be significantly different in a Note Issuance deal? And will the trustee’s role be markedly altered?
Being that Notes are short to medium -term corporate bonds with typical maturities under 10 years from the date of issue, and having regard to the fact that other parties such as the issuing house, registrars, receiving banks, rating agencies etc., are involved, which is usually not the case with the typical bank-led debt transactions, the set-up process for Notes are likely to differ significantly, although the structure after set-up may be similar in a few cases. The Note trustee’s role will principally be the protection of the interests of the Noteholders who, in most cases, would be diverse and geographically dispersed, to ensure that they receive their returns on investment, as promised under the Trust Deed.
In addition, depending on the type and structure of the Note, the Trustee may be required to maintain the Sinking Fund; or where the Note is backed by other assets such as land, buildings, plant or machinery, etc., the Trustee would be required to hold good title to and manage such assets in accordance with the provisions of the Trust Deed and Finance Documents.
Bearing in mind government focus on small, medium scale enterprises in Nigeria, are there any benefits for small business owners who are looking to expand their businesses?
There certainly are immense benefits for small business owners. Essentially, SBOs are often limited by the number of assets available to be used as security or collateral for loans from the Banks, which would expectedly hinder the rate of expansion of their business. To avoid a situation where they are unable to borrow against an asset already pledged as collateral for an existing loan, as has been earlier mentioned, a security trust arrangement should be structured in anticipation of the contemplated credit exposure for the expansion of its business.
In most cases, where the trust is appropriately structured such as is acceptable to the banks, small and medium scale business owners would have something of a bargaining position.
This might be digressing, hopefully not too far off, but what options are available for private, high or ultra-high networth individuals?
As successful individuals, with ever-growing financial requirements and aspirations, high or ultra-high networth individuals may wish to put in place estate planning structures to safeguard and consolidate their continuously growing assets, as well as plan towards a smooth, confidential and tax efficient transfer of those assets from one generation to the next, while maintaining an active role in making investment decisions.
And giving their comparative benefits, trusts remain the best alternative for leaving a legacy while securing the future of beneficiaries and ensuring an adequate succession structure is put in place, even while the settlor is alive. For instance, one can structure a succession plan for his estate and at the same cater for his/her charitable objectives by setting up a private foundation.
At Vetiva Trustees, we understand the fact that no two HNIs are the same and consequently, objectives would vary. This spurs our passion in the setting-up and management of bespoke trust structures while maintaining the highest fiduciary standards. Our style is based on our knowledge that wealth transmission is a critical element in financial security, which when properly structured makes a lot of difference in ensuring that one’s effort towards the accumulation and management of his wealth go as planned.
Tell us a bit about Vetiva Trustees Limited
Vetiva Trustees is a wholly-owned subsidiary of Vetiva Capital Management Limited. We are licensed and approved by the Securities and Exchange Commission to carry on the business of trusteeship in the Nigerian capital market. We offer specialised Trust services to corporate entities, public institutions and high networth individuals, while ensuring that we adhere to the highest fiduciary standards, policy of confidentiality and global best practices in our industry.
Notwithstanding, we make it a point of duty to ensure that the trust solutions we offer our clients are tailor made to meet their objectives while keeping a close watch on counter party risks and transaction cost.
Some of our areas of expertise to which our team of professionals have proved ourselves include security and debenture trust services, trustees to employee benefit schemes and housing trust schemes, note, bond fund trusteeship, escrow agency services, corporate services. Others include structuring of private trusts, estate planning advisory, executorship and family office services.
