Template:M intro repack covenant to pay: Difference between revisions

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Template:M intro repack covenant to pay (view source)

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(Created page with "You might wonder what on ''Earth'' this is all about, especially if you encounter it cast in wrought iron with that impenetrable prose that the School Matron beats into Clifford Chance trainees with her rolling pin, during their Debt Capital Markets seat. You know it is true, Clifford Chance people. {{quote|{{small|70}}The Issuer will, on any date when the Notes of any Series, or any of them, become due to be redeemed in whole or in part in accordance with these pre...")
 
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You might wonder what on ''Earth'' this is all about, especially if you encounter it cast in wrought iron with that impenetrable prose that the School Matron beats into Clifford Chance trainees with her rolling pin, during their Debt Capital Markets seat. You know it is true, [[Clifford Chance]] people.
You might wonder what on ''Earth'' this is all about, especially if you encounter it cast in wrought iron with that impenetrable prose that the School Matron beats into Clifford Chance trainees with her rolling pin, during their Debt Capital Markets seat. You know it is true, [[Clifford Chance]] people.
 
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{{quote|{{small|70}}The Issuer will, on any date when the Notes of any Series, or any of them, become due to be redeemed in whole or in part in accordance with these presents, unconditionally pay or procure to be paid to or to the order of or for the account of the Trustee, in respect of such Series, in the currency or currencies in which the Redemption Amount (or part thereof) or other amount (including interest) payable upon such redemption is due in same day funds or, as the case may be, immediately available, freely transferable, funds in the relevant currency of the Redemption Amount or other amount payable upon such redemption then becoming due on that date in respect of such Series (together with any applicable premium) and shall (subject to the terms of such Series and other than in the case of Notes which bear no interest) until such payment (after as well as before any judgment or other order of a competent court) unconditionally pay to or to the order of or for the account of the Trustee in respect of such Series, as aforesaid, interest on the Redemption Amount or such other amount due and payable upon such redemption of the Notes of such Series then outstanding at the rate or rates set out in, or calculated from time to time in accordance with, the terms thereof and on the dates provided for in such terms, provided that:  
{{quote|{{small|80}}The Issuer will, on any date when the Notes of any Series, or any of them, become due to be redeemed in whole or in part in accordance with these presents, unconditionally pay or procure to be paid to or to the order of or for the account of the Trustee, in respect of such Series, in the currency or currencies in which the Redemption Amount (or part thereof) or other amount (including interest) payable upon such redemption is due in same day funds or, as the case may be, immediately available, freely transferable, funds in the relevant currency of the Redemption Amount or other amount payable upon such redemption then becoming due on that date in respect of such Series (together with any applicable premium) and shall (subject to the terms of such Series and other than in the case of Notes which bear no interest) until such payment (after as well as before any judgment or other order of a competent court) unconditionally pay to or to the order of or for the account of the Trustee in respect of such Series, as aforesaid, interest on the Redemption Amount or such other amount due and payable upon such redemption of the Notes of such Series then outstanding at the rate or rates set out in, or calculated from time to time in accordance with, the terms thereof and on the dates provided for in such terms, provided that:  
:3.1.1 the Issuer shall only be obliged to pay such Redemption Amount or other amount payable upon such redemption, premium (if any) and interest (if any) to the extent set out in these presents and all relevant Issue Terms in respect of such Series;  
:3.1.1 the Issuer shall only be obliged to pay such Redemption Amount or other amount payable upon such redemption, premium (if any) and interest (if any) to the extent set out in these presents and all relevant Issue Terms in respect of such Series;  
:3.1.2 every payment of a Redemption Amount, premium (if any) or interest (if any) in respect of Notes of such Series made to or to the order or for the account of the Principal Paying Agent or, as the case may be, the Registrar as provided in the Agency Agreement shall, to such extent, satisfy such obligation except to the extent that there is failure in the subsequent payment thereof to the relevant Holders of such Series under the terms of the relevant Series; and  
:3.1.2 every payment of a Redemption Amount, premium (if any) or interest (if any) in respect of Notes of such Series made to or to the order or for the account of the Principal Paying Agent or, as the case may be, the Registrar as provided in the Agency Agreement shall, to such extent, satisfy such obligation except to the extent that there is failure in the subsequent payment thereof to the relevant Holders of such Series under the terms of the relevant Series; and  
:3.1.3 in the case of any payment in respect of Notes of such Series made after the due date or subsequent to an Event of Default in respect of such Series, payment shall not be deemed to have been made until the full amount due in accordance with the terms thereof has been received by the Principal Paying Agent or, as the case may be, the Registrar or the Trustee in respect of such Series and notice to that effect has been duly given to the relevant Holders of such Series in accordance with such terms.  
:3.1.3 in the case of any payment in respect of Notes of such Series made after the due date or subsequent to an Event of Default in respect of such Series, payment shall not be deemed to have been made until the full amount due in accordance with the terms thereof has been received by the Principal Paying Agent or, as the case may be, the Registrar or the Trustee in respect of such Series and notice to that effect has been duly given to the relevant Holders of such Series in accordance with such terms.  
The Trustee will hold the benefit of this covenant in relation to each Series on trust for itself and the Holders of the Notes of that Series according to their respective interests. </div>}}
The Trustee will hold the benefit of this covenant in relation to each Series on trust for itself and the Holders of the Notes of that Series according to their respective interests.<ref>[https://sp.morganstanley.com/EU/Download/GeneralDocument?documentID=4ac9b91c-4bdd-4ba6-a6e9-d7d5423fc48e if you don’t believe me.]</ref></div>}}}}


So, in brief:
So, what ''is'' it all about? Well, in brief:
===What the covenant to pay is all about===
====What the covenant to pay is all about====
The note is a [[unilateral contract|unilateral]], [[bearer instrument]]. Holders appoint a trustee to represent their interests as creditors — somewhat interesting — but also to hold security interests for them and the other Secured Parties.  
The note is a [[unilateral contract|unilateral]], [[bearer instrument]]. Holders appoint a trustee to represent their interests as creditors — somewhat interesting — but also to hold security interests for them and the other Secured Parties.  


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The security trustee holds the covenant on trust for noteholders, other secured parties (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 security trustee holds the covenant on trust for noteholders, other secured parties (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.


===Why have separate covenants to the Trustee, if they are direct covenants under the Notes?===
====Why have separate covenants to the Trustee, if they are direct covenants under the Notes?====
====Privity ====
====Privity ====
As described above. it establishes a direct contractual relationship between the Issuer/chargor and Trustee for the main indebtedness, which there would otherwise not be (albeit that the Trustee holds this obligation on trust for the Secured Parties)
As described above. it establishes a direct contractual relationship between the Issuer/chargor and Trustee for the main indebtedness, which there would otherwise not be (albeit that the Trustee holds this obligation on trust for the Secured Parties)
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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.
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