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What is the Role of the Trustee?

What is the Role of the Trustee?

Definition:

A trustee is a financial institution, usually a bank, that is appointed by the issuer to be responsible to monitor the loan, ensure compliance with loan terms, distribute payments to bondholders, and generally act in the interest of bondholders and the general public by administering certain terms of the loan according to the bond indenture.

At a minimum, the trustee acts as the paying agent and handles the distribution of interest and principal payments to bondholders. The trustee can also be assigned the roles of: 

  1. Transfer agent, which keeps records of bond ownership and bond transfers 
  2. Holder and distributor of the bond proceeds (e.g., construction fund) of a bond financing. In this capacity, the trustee is instructed by the borrower when to transfer funds to third parties (e.g., construction company).

Example:

A borrower sells a $15 million par bond issue to fund a project. The proceeds are given to the trustee who in turn deposits the money in several accounts such as the construction account, the capitalized interest account, and the debt service reserve account and pays off the general expenses of the bond issuance.

What’s important here?

The trustee is given the proceeds from a bond issuance and based on the instructions of the borrower, invests, reinvests and expends the money as specified in the bond documents or requested by the issuer.