Background
Firstly, security trustee services are not regulated by the FCA. Disclaimers on some of the larger security trustee websites state something along the lines of “we do not perform oversight of the business” and “limited to administrative duties in case of event of default”.
Their only role, it seems, is to register a charge against an SPV. This does not mean that there are any tangible assets within the SPV to liquidate in the event of a default.
What is a Security Trustee?
In many cases, secured debt securities require the appointment of a corporate entity or individual to serve as the Security Trustee. The company (referred to as the Borrower or Issuer) that issues these securities receives funds from lenders (or Investors) under the terms of the security instrument. This instrument may include various forms of security, such as a charge over property, a debenture over the company’s assets and operations, a bank account, or a combination of other security types. The Security Trustee holds these security interests on behalf of the investors.
The Security Trustee is an independent party appointed to represent the collective interests of the investors. Its role involves holding the security, such as a charge or debenture, on behalf of the investors until the terms of the agreement are fulfilled. Typically, the Security Trustee does not engage in the day-to-day operations of the company, nor does it have control or oversight of the company’s management, unless explicitly stated in the Security Trustee Deed Agreement, which outlines the Trustee’s duties and responsibilities.
The Security Trustee’s main responsibility is to act impartially while safeguarding the interests of the investors, particularly if the Borrower fails to meet its financial obligations as defined in the Security Trustee Deed Agreement or the security instrument. In such cases, the Security Trustee may take action, which could involve appointing insolvency practitioners to place the company into administration, receivership, or liquidation. In any of these scenarios, the assets (if any) secured by the charge held by the Security Trustee are protected and ring-fenced for the investors, shielding them from claims by the company’s unsecured creditors.
Is a Security Trustee a financial guarantee?
Bluntly, no.
One of the most common misconceptions about a Security Trustee is the belief that it guarantees the value of the secured assets or ensures the borrower’s financial obligations to the investors are fully met. In reality, a Security Trustee’s role is simply to hold the assets on behalf of a group of investors through a charge. There is no assurance that the value of these assets will be sufficient to cover the borrower’s debt, and typically, the Trustee does not conduct any valuation analysis of the issuer or assess the worth of the underlying assets.
The primary function of the Security Trustee is to manage the process of liquidating the charged assets and, if necessary, appoint administrators to recover as much value as possible for the bondholders in the event of a default. However, the amount recovered, if any, is subject to the availability of assets and the prevailing market conditions at the time of liquidation.
Final Thoughts…
To summarise, the fact that a security trustee is put in place within a financial transaction is really meaningless unless or until the financial instrument defaults.
The real question should be asked, what assets are actually securing investors? If the issuer cannot provide evidence of tangible collateral that is registered to the company or SPV then the investment they are offering to you is probably largely or wholly unsecured. Largely, it could be considered that the “security trustee” is just an expensive marketing tool for issuers.
