Issuers appoint an indenture trustee to enforce the indenture, providing administrative functions such as collecting payment due to investors and preserving claims. The indenture trustee a trustee of the issuer and legal agent for bondholders under the Commercial Act.
Procedures of Indenture Trustee Service
- Information management and monitoring
- Signing of contract: Each party's rights and duties, and a financial covenant that protects investors are decided.
- Information management: KSD manages information on the issuer, bonds, the issuers' execution of contracts, and changes in its credit rating.
- Monitoring: KSD monitors the execution of the contract (whether principal and interest are paid), changes in financial and credit conditions, information submitted by the issuer, and other issuer disclosures.
- General meeting of bondholders and perseveration of claims
When signs of default are detected
- Management of bond rights: KSD deals with the default (trigger clause), provides information about bondholders, investigates the business and financial status of issuers, requests remedy, and evaluates collateral, etc.
When default occurs
- Preservation of claim: KSD holds a general meeting of bondholders, takes measures for preservation of claims (attachment, instituting a lawsuit, etc.), participates in bankruptcy and rehabilitation procedures, and receives and pays tender.
Benefits of Indenture Trustee Service
Increased opportunities for fundraising through corporate bonds Increased opportunities for fundraising through corporate bonds Management of issuers' credit risk
KSD manages the credit risk of bonds by checking issuers' credit and financial information. Additionally, KSD supports issuers to maintain financial stability.
Adjustment of interests between issuers and bondholders
Indenture trustee collects bondholders' opinions through general meetings of the bondholders. If the business condition of the issuer deteriorates, KSD curbs individual investor actions such as early redemption requests. KSD, as a mediator, coordinates the sharply divergent interests of issuers and bondholders.
Reduced agency cost of debt
When corporate bond issuers under-invest to avoid risk or make investments favorable to only shareholders, agency cost of debt, such as the cost of monitoring the management, is incurred to keep the issuer in check. The indenture trustee can cut these costs through a special provision in the indenture trustee contract.
Enhanced protection for corporate bond investors Enhanced protection for corporate bond investors Bondholder protection through constant monitoring
The indenture trustee regularly checks whether issuers fulfill their indenture contracts. Also, it monitors issuers’ ability to perform its redemption obligations by checking the current finances and credit rating.
Cost- and time-saving through proxy exercise
When an issuer defaults, the indenture trustee, which staff possesses the requisite expertise, take active measures to preserve the interests and exercise the legal rights of bondholders, protecting the bondholders and saving the cost and time of exercising rights individually.
Support for convenient rights exercise
KSD operates the general meeting of bondholders to enable rational decision-making, and equally distributes the bondholders’ rights through preservation of claims, such as receipt and payment of tender.