Security trustee
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The Law and Lore of Repackaging
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Security trustee
/sɪˈkjʊərɪti/ /trʌsˈtiː/ (n.)
One who holds the security in a repackaging or asset-backed security for the benefit of itself and the other secured parties.
Security trustees are inert bodies at the best of times, but are especially so when it comes to repackagings. They are like Vogons. They would not, as Douglas Adams once put it (about Vogons)
“... even lift a finger to save their own grandmothers from the Ravenous Bugblatter Beast of Traal without orders signed in triplicate, sent in, sent back, queried, lost, found, subjected to public inquiry, lost again, and finally buried in soft peat for three months and recycled as firelighters.”
The security trustee equivalent of “orders signed in triplicate, sent in, sent back, queried, lost, found, subjected to public inquiry, lost again, and finally buried in soft peat for three months and recycled as firelighters” is:
“subject to being satisfactorily indemnified, prefunded and/or secured before being obliged to take any action whatsoever”
This is the standard operating procedure for any trustee. It is a good way of ensuring one appears to be there, doing a sound job and protecting everyone’s interest, whilst not really being obliged to do anything beyond collecting a fee.
As far as repackagings are concerned, we do not scold this approach: we endorse it: the security structure of a repackaging programme is a sinecure, designed only to save the blushes of learned counsel should the limited recourse ringfencing that they grandly erected around each series turns out not to work.
In other cases, it is apt to create the misleading impression that a note trustee is any more use in a securitisation structure than not having a note trustee. We are less concerned with those normal, non-repackaging style, secured bond issues — outside the wider securitisation world they are pretty rare — but suspect the same goes. Trustees do not expect to have to do anything, and generally speaking, they will be right.
On not getting carried away about the security package
We shouldn’t get too hung up about the whys and wherefores of the security structure of a repackaging as long as it is there, it covers all the rights and assets it is meant to cover, and all necessary perfections and execution formalities are observed. For in a repackaging, the security just sits there and will almost certainly never be exercised.
All that tedious business about automatically releasing it to make payments, powers to appointing receivers, calling and collecting in, the trustee’s rights and obligations under the Law of Property Act 1925 and so on — look it is all good stuff; let your trustee lawyer have his day — but as long as it is there, none of it really matters.
Why? Because — unless you have negligently buggered up your ring-fencing and your Trustee has let you: both of these are quite hard to do — the SPV cannot go insolvent. Any repack redemption will be triggered by an external event: a non-payment on an underlying asset or by a failing counterparty or agent. None relate to the solvency or ability to meet its debts of the Issuer itself.
That being the case, once it exists, the security package will never actually do anything: any diminution in value to of the secured assets — will happen regardless of how strong the security is. The security is a formal belt and brace there to fully isolate from each other the noteholders of different series, and even that only matters only when the SPV is bankrupt. Which is, never.
The limited purpose of the security package in a repackaging is widely misunderstood – all it does is defend against unexpected holes in the ring-fencing.
This is why it is de rigueur to accelerate, liquidate and distribute the proceeds of a repackaged note without enforcement of the security.