Covenant to pay

The Law and Lore of Repackaging Go Premium Covenant to pay in a Nutshell™ The Issuer must unconditionally pay principal when it becomes due in the Contractual Currency, with interest, as set out in the Conditions. The Issuer can satisfy that obligation by payment to the Issuing and Paying Agent, provided the Issuing and Paying Agent then pays Noteholders. The Trustee holds this covenant on trust for the Noteholders. Repack Anatomy: Hedging exemption | Covenant to pay | Quoted Eurobond exemption | Pre-enforcement | The curious structure of an MTNIndex: Click ᐅ to expand: Repackaging Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

You might wonder what on Earth this is all about, especially if you encounter it cast with the wrought iron prose that the school matron beats into Linklaters trainees with her rolling pin during their Debt Capital Markets seat.

There is a trustee for noteholders.

The covenant gives the trustee a standing to act on the noteholder’s behalf under a unilateral bearer instrument (the note itself) to which the trustee is not otherwise party.

The issuer discharges its covenant to the trustee when it pays away the amount in full to the paying agent - it has, after all, parted with its money, put them in the hands of a professional financial institution, and done everything if can do. But if the agent then fails — it can happen, kids — before paying noteholders the Issuer’s obligation springs back. This is so issuer has a loss it can sue the agent for... if issuer’s debt to noteholders is discharged by payment to its own paying agent, then noteholders have no claim under the notes at all, therefore the issuer has no liability, suffers no claim, and has no rationale for proving in the agent’s insolvency.

The holding the covenant on trust for noteholders we guess is extra security and allows noteholders to trace funds vs trustee if it does a bolter?

See also

• Signal versus noise