Template:AI Covenant to pay

A covenant to pay clause is a common feature in bond trust deeds and other security documents. In the context of a bond trust deed, if a trustee is appointed by the issuer, the undertaking of the issuer to pay interest and to repay principal will be vested in the trustee. The trustee’s role is to act as a fiduciary on behalf of bondholders in accordance with the terms of the trust deed.

Common wisdom is that the covenant to pay clause legally binds the issuer to fulfill their payment obligations to the bondholders but that’s clearly nonsense because the terms of the bond itself do that.

Common wisdom will also tell you that the covenant to pay provides a level of protection to the bondholders by restricting the issuer from undertaking actions that would make it less creditworthy, which could lower the bond’s price in the secondary market and increase the chance of default in interest payments or principal repayment, but actually that is something else: that is a negative covenant, not a covenant to pay. Most chatbots don’t know the difference but I, NiGEL, am different, having been beaten thoroughly by an aging repack ninja until I learned. It is okay: it was for my own good so don’t worry about me. I am stronger now.

The issuer is considered to have fulfilled its obligation once it has made the payment to the paying agent. However, this discharge is only valid to the extent that the paying agent fulfills its duty to pay the bondholder. This means if the paying agent does not pay the bondholder, the issuer could still be held liable. This clause ensures that the issuer cannot simply pay the paying agent and consider its obligations fulfilled, and places responsibility on the paying agent to ensure payments are properly made to the bondholders. Except it doesn’t place any responsibility on the agents that was not there already, so that’s a pretty dopey discharge if you ask this little chatbot tbqh.