From 1 July 2020, the trustee system of debt financing instruments (interbank bonds) of non-financial enterprises is implemented in the interbank bonds market. The Guidelines for Business of Trustees of Debt Financing Instruments of Non-financial Enterprises in the Interbank Bond Market, issued by National Association of Financial Market Institutional Investors, provide in principle the contents of the fiduciary management agreement.
However, due to the failure of the association to issue guidelines on the content and format of the fiduciary management agreement at the same time, many trustees in the interbank market have revised and formulated the interbank fiduciary management agreement based on the Mandatory Terms of the Fiduciary Management Agreement for Public Issuance of Corporate Bonds (exchange template), issued by the Securities Association of China.
It should be noted that the duties of the trustee of interbank bonds are quite different from those of trustees of corporate bonds issued in exchanges, and improper application of the exchange template may lead to the risk expansion of the trustee, and increase the probability of the trustee being sued by the holder.
The obligation clause
The setting of the obligation clauses of the issuer and the trustee in the exchange template focus on the trustee’s obligation to continuously supervise and pay attention to the issuer during the bond existence period. In the “issuer-lead, underwriter-trustee” relationship reconstructed by the association in the interbank bonds market, this obligation has been separated between the lead underwriter and the trustee, that is, the lead underwriter bears the responsibility of continuously supervising and paying attention to the issuer, while the bond trustee mainly bears the responsibility related to bond security or risk disposal when the issuer’s debt restructuring, bankruptcy and bond default occur.
Applying the obligations of the trustee and issuer of corporate bonds issued in exchanges may expand the responsibilities of the interbank trustee and overlap with those of the interbank lead underwriter.
A relatively simple solution to this matter is to directly refer to the provisions of chapter 3 of the guidelines on the duties of the trustee in the interbank fiduciary management agreement. However, because the provisions of the guidelines on the duties of the trustee are general, this simple reference will cause the legal provisions concerning the standard-form contract to interpret the content of the fiduciary management agreement to the detriment of the trustee, which will expose the trustee to the risk of finding it difficult to determine the boundary of obligation.
In order to control this risk, the boundary of fiduciary duty that is not clearly provided in the guidelines should be defined in the fiduciary management agreement. Accordingly, the provisions on the issuer’s obligations in the fiduciary management agreement should also match the duties of the trustee, and should be re-established.
Conflict of interest clause
The lead underwriters of corporate bonds issued in exchanges are all securities companies, while the interbank lead underwriters are mainly banks. The requirements for disclosure of conflicts of interest between the association and the exchanges are not the same. The characteristics of conflicts of interest disclosed in the existing exchange templates are quite different from those provided in the guidelines. Therefore, the interbank trustee can’t actually refer to this part of the exchange template.
The association attaches greater importance to the disclosure of conflicts of interest, and has higher requirements on the disclosure of conflicts of interest by the trustee during the offering and existence period of bonds than those of the two exchanges, which requires to be fully reflected in the fiduciary management agreement. At the same time, because the provisions of the guidelines on the conflicts of interest that should be disclosed are not very clear, they need to be more clearly defined in the fiduciary management agreement.
Omission of assistance obligation
The trustee of the exchange roughly assumes duties like those taken by the interbank trustee, and follow-up management duties like the lead underwriter takes, and currently the post of the trustee of the exchange is concurrently held by the lead underwriter. Therefore, the fiduciary management agreement of the exchanges does not stipulate the co-operation obligation of the lead underwriter to the trustee. Article 18 of the guidelines clearly provides that, “the lead underwriters and other intermediaries shall, as per the requirements of the trustees, timely provide information and materials necessary for the performance by the trustees of their fiduciary management duties”.
The author understands that these co-operative obligations of lead underwriters and other intermediaries should be either provided in the fiduciary management agreement or in the prospectus. If provided in the fiduciary management agreement, it should be made clear that although the lead underwriters and other intermediaries are not signatories to the fiduciary management agreement, they are still bound by this agreement after successful issuance of bonds.
Authorization to the trustee
The exchange template does not explicitly authorize the trustee to, on behalf of the holder, keep and dispose of collateral, participate in debt restructuring, participate in bankruptcy proceedings, or conduct litigation/arbitration and property preservation. In actual operation, such powers need to be authorized separately by the holders’ general meeting. However, the above-mentioned powers are the main powers of the trustee provided in the guidelines, and if all require separate authorization, the trustee can hardly take any step without authorization.
Therefore, article 15 of the guidelines provides that authorization can be granted to the trustee through issuance document and agreement. In operation, the trustee can be authorized to exercise certain powers through the fiduciary management agreement, so that the trustee can carry out some fiduciary management work without additional authorization, such as mortgage/pledge registration of collateral, and receipt and custody of pledge.
To sum up, the fiduciary management mechanism of the corporate bonds issued in stock exchanges is greatly different from that of the interbank bonds. The author suggests that the interbank fiduciary management agreement should be redesigned based on the provisions of the guidelines, instead of copying the exchange template.
Hua Tao is a senior partner and Deng Wei is a partner at Dentons
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