Appointment, replacement and retirement of Trustee

The Law and Lore of Repackaging →Go uptown Repack Anatomy: Hedging exemption | Covenant to pay | Quoted Eurobond exemption | Pre-enforcement | The curious structure of an MTNIndex: Click ᐅ to expand: Repackaging Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

“In theory, there is no difference between theory and practice. In practice, there is.”

—Yogi Berra

Herein a crucible of the agency problem. It seems an uncommon condition amongst modern agents that they are unable to sensibly estimate the amount of effort they will be required to put into a commitment, and therefore are unable to make a commitment without a free walk-away.

But financiers ought to know any contract, once signed, has a negative or positive value, broadly corresponding to whether the person making it made a good, or a bad, bargain. Once you have made that bargain, you should be held to it.

Retirement of agents

It is an age-old dilemma: you have an asset-backed securitization with, say, a 10-year term. You engage, at considerable cost — though that is not how they see it — the usual corporate agency suspects: a security trustee, paying agent, registrar, custodian, and so on.

Each has built, over time, a reputation for probity, capacity and permanence in the delivery of the services for which you engage them. Indeed, part of the reason you appointed, say, a sclerotic US commercial bank as your paying agent and not some fintech start-up founded by a couple of guys and a Bratislavan coder they found on UpWork is that sleepy commercial banks promise dependability. Continuity. Experience. They have a kind of existential momentum: they are most unlikely to exit a business they have been in for seventy years, from which they make a dependable annual income on an appreciable scale, and over which time they have garnered the experience and wisdom to make a robust, resilient and most of all competent business that has seen everything there is to see.

The most likely succession scenarios, by far, come about through corporate succession: mergers and business sales between banks can involve the transfer of a whole business “book” from one corporate agency to another or its assumption through a merger. More rarely, a corporate agent might fail altogether, leaving the arranger with the prospect of transferring its contract obligations to a replacement provider. That is a “hard cheese” scenario where the arranger will just have to foot the bill.

But corporate agents rarely just resign their appointments apropos nothing at all. Yet they will all insist on retirement rights: a “termination without fault on notice” with an unnervingly short notice period — something like three months.

This, they will airily explain, is required by policy, or capital regulation, and in any case, is quite immovable as a commercial term of their engagement. This is just one of those brute facts of the world. We don’t imagine a corporate agent would ever dream of exercising that right, but still, it behoves us to consider what the implications would be if it did.

If we assume the agent’s fee is calculated to some extent as a function of the time of its appointment — generally it is “basis points running”, we should assume a retiring agent would not claim the portion of its fee attributing to the undischarged portion of the contract.

And let us credit the agent with business acumen: we would expect it only to retire its appointment where its agreed running fees were not providing it with an adequate return. In other words, where the agent had made a bad bargain.

Upon such a departure, the arranger is left to find a replacement, with only the unclaimed balance of the retiring agent’s fees to pay for it. since, QED, the retiring agent couldn’t make this work, we should not expect an income to fancy the fag end of a bad deal.

We live in an imperfect world with a structural shortfall of sympathy. We should not expect many tears to be shed for securities arrangers, but this is a pretty lousy outcome all the same.

You committed yourself for a fixed term, you negotiated the rate, and now you propose to walk away. Should you not be the one to pay the difference an incoming agent requires to hold its nose and take on this role? Should not this be your problem, not the arranger’s?

The answer in theory is clearly yes, but this is where Yogi Berra’s observation proves its worth.

“We don’t get paid enough to accept liability ...”

But, you see, the thing is, you do. If you don’t, that is because you have mispriced your own performance risk. That is no-one’s fault but your own.

Law firm fixed quotes

Another great example: how is it that experienced global law firms have no sense of how much they will have to charge to document standard transactions.

This is quite the mystery: have these firms not been in business, for decades, doing just this sort of thing, over and over, charging their armies of lawyers out for 1,800 hours per year? Why are they so poor at estimating their own time expenditure?

They may throw up their hands and blame their captious clients. “how am I meant to control the degree of pettifoggery and anal retentivity that will inevitably be brought to the negotiation by my own client, let alone everyone else’s?”

This would be a fair objection if you had never documented a transaction before. But this is the operating environment for every capital markets transaction, so a little more wisdom and common sense is required. You are not required to control it; only anticipate it.

Law firms, of course, hold their financial services clients captive and would never suffer such a restriction on their operating conditions.