Covenant to pay: Difference between revisions

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The Trustee holds this covenant on trust for the Noteholders.}}}}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.
The Trustee holds this covenant on trust for the Noteholders.}}}}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.  
So, in brief:
===What the covenant to pay is all about===
The note is a [[unilateral contract|unilateral]], [[bearer instrument]]. Holders for the time being appoint a trustee to represent them.  


The [[covenant]] gives the trustee a [[locus standi|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 trustee does not hold the note, so otherwise would have no rights under it. This covenant gives the trustee legal standing to sue/act for noteholders.


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 — [[global financial crisis|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.
Also, the issuer makes its payments to noteholders via a [[paying agent]] (normally, a bank). There is an odd interregnum between the issuer paying its agent, and the agent paying the noteholders, which it does through [[Clearing system|clearing systems]]
 
The issuer’s covenant is discharged by paying the principal it owes to its agent. At that point it has done everything it can do.
 
But if the agent then fails before paying noteholders — it can happen — the issuer should not be discharged from its obligation to the noteholders. One cannot escape liability to a principal by giving money to your own agent.
 
At this point, the noteholders have a claim for default against the issuer, and the issuer has a claim against its (insolvent) paying agent.
 
The trustee holds the covenant on trust for  noteholders (and itself to the extent of its own fees) to defend against trustee running off with the money: under the trust noteholders can trace  their claims in the trustee’s hands if the trustee does a bolter.


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?
{{Sa}}
{{Sa}}
*[[Signal versus noise]]
*[[Signal versus noise]]

Revision as of 12:20, 1 November 2022

The Law and Lore of Repackaging

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.

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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.

So, in brief:

What the covenant to pay is all about

The note is a unilateral, bearer instrument. Holders for the time being appoint a trustee to represent them.

The trustee does not hold the note, so otherwise would have no rights under it. This covenant gives the trustee legal standing to sue/act for noteholders.

Also, the issuer makes its payments to noteholders via a paying agent (normally, a bank). There is an odd interregnum between the issuer paying its agent, and the agent paying the noteholders, which it does through clearing systems

The issuer’s covenant is discharged by paying the principal it owes to its agent. At that point it has done everything it can do.

But if the agent then fails before paying noteholders — it can happen — the issuer should not be discharged from its obligation to the noteholders. One cannot escape liability to a principal by giving money to your own agent.

At this point, the noteholders have a claim for default against the issuer, and the issuer has a claim against its (insolvent) paying agent.

The trustee holds the covenant on trust for noteholders (and itself to the extent of its own fees) to defend against trustee running off with the money: under the trust noteholders can trace their claims in the trustee’s hands if the trustee does a bolter.

See also

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