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Covenant to pay: Difference between revisions
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There will generally be a due date — the scheduled maturity date, for example — and this is undoubtedly the point from which the Noteholder’s [[simple contract]][ 6-year limitation period runs, but the ninja wizardry is to buy the ''secured'' “specialty” covenant a few more precious days (you know, should 12 ''years’'' worth of days not be quite enough) by making the security covenant bite “when demanded ''on or after the due date''” — the italicised reference to the due date being there so as not to convert a term loan into a demand loan. (I know what you are thinking, and you’re right: lawyers sometimes need a slap). | There will generally be a due date — the scheduled maturity date, for example — and this is undoubtedly the point from which the Noteholder’s [[simple contract]][ 6-year limitation period runs, but the ninja wizardry is to buy the ''secured'' “specialty” covenant a few more precious days (you know, should 12 ''years’'' worth of days not be quite enough) by making the security covenant bite “when demanded ''on or after the due date''” — the italicised reference to the due date being there so as not to convert a term loan into a demand loan. (I know what you are thinking, and you’re right: lawyers sometimes need a slap). | ||
====That weird “[[pro tanto]]” discharge==== | |||
{{quote|...provided that payment of any sum due in respect of the Notes made to the Principal Paying Agent shall, ''[[pro tanto]]'', satisfy such obligation except to the extent that there is failure in its subsequent payment to the Noteholders under the Conditions.}} | |||
This such standardised boilerplate in [[Repackaging programme|repack]] [[trust deed|trust deeds]] that trustee counsel will ask that it is included as some kind of Pavlovian, behavioural response. We are not sure what it is meant to do, but we are actively trying to find out and will let you know if we find out. | |||
What is going on here? | |||
Firstly, bear in mind that the convoluted nature of debt securities means the note issuer — the legal entity that owes noteholders the debt represented by the Notes — cannot discharge its debt but through its paying agents. In the old world, the bond conditions mandate payment by paying agents on the issuer’s behalf, against presentation to those agents of the notes and coupons in preparation for the mythical annual [[Balearic bender]]. | |||
The issuer cannot discharge its debt directly. What it can do is pre-fund its agents — well, in point of fact, the ''principal'' paying agent — in preparation for the swamping tide of [[Belgian dentist]]s rocking up toting battered suitcases full of coupons and [[Balearic bender|EasyJet tickets to Ibiza]]. | |||
The issuer says, “since my payment to my bankers is the last point at which I can influence the payment to bondholders, I should like the Trustee to acknowledge that, by that payment, my covenant is discharged. I should not be held liable for double counting. I have done my bit.” | |||
“Fair enough,” says the Trustee. “But, by the same token, the noteholders are taking ''your'' credit, not the paying agent’s. So we cannot have it that you can avoid liability for your own debt by paying money to your own agent, who then goes and loses it. A [[principal]] remains liable for a [[Disclosed agency|disclosed agent]]’s performance. Everyone knows that.” | |||
The ingenious compromise is to discharge the Issuer “''pro tanto''” — by payment to its agent, ''but only to the extent the paying agent then makes payment to the noteholders.'' | |||
That, of course, is no different than only discharging noteholders when they are actually paid, of course. | |||
{{Sa}} | {{Sa}} | ||