INTERNATIONAL FINANCINGS


In this chapter, we describe the role of indenture trustees in the U.S. for international financings as well as the differences in the roles of the trustee here and in the United Kingdom.

U.S. Trust Law

The trustee function in the U.S. in the international marketplace has its origins in the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990. Under an indenture, the trustee has three areas of responsibility:
1) The trustee holds and manages funds and any collateral if the bonds are secured.
2) The trustee maintains and administers the indenture, supplemental indentures, and other documents relevant to the bond issuance and monitors compliance with the covenants and other provisions of the indenture through periodic reports filed with it.
3) The trustee enforces the remedial provisions of the indenture in an event of noncompliance or a default.
This is still true in international financings. However, international financings are not as carefully regulated as in the United States. There are more concerns as a result of foreign historical concepts and cultural differences.

The decision makers are the investment bankers, not the issuers. Financings range from conventional straight debt, which may be convertible and subordinated, to very complex structures such as project finance, securitization, and repackaging of assets. Issuers range from governments to corporations to special purpose entities.

The Euro

The largest international market is still the Euromarket which began about 50 years ago, with now more than $1 trillion of debt outstanding. It is the one true global market, but there are other prominent markets as well: Latin America, Asia, the Pacific Rim, and Russia. The Euromarket is loosely regulated, multi currency, multi-jurisdictional, and its primary aim is flexibility and liquidity.
Payment of interest and principal range from U.S. dollars, euros, pound sterling, yen, etc., and commonly debt is paid in multiple currencies.
Thirteen European Union countries, out of the twenty-seven Member States, currently have adopted the euro as their common currency. The original eleven on January 1, 1999: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. Then followed Greece and, as of January 1, 2007, Slovenia. Cyprus and Malta will adopt the euro on January 1, 2008.
Denmark and the United Kingdom have a special status allowing them to decide, and if, they will join in adopting the euro.
The remaining Member States will join as soon as they fulfill the necessary conditions required by the “Maastricht” convergence criteria.1

Appointment of a Common Depository

Most international financings listed on foreign exchanges which use the major European clearing systems, Euroclear and Clearstream, require the appointment of a common depository. The common depository function requires a bank to:
1) Maintain records for the clearing systems;
2) Report daily changes in holdings;
3) Report material changes in a financing;
4) Maintain aggregate holdings versus nominal
holdings; and

5) Maintain the status of global notes.

Registrar Function

The registrar function is basically the same as in the United States – a bank maintains the records of bearer certificates outstanding and certificates registered as to principal only and any in fully registered form and processes any transfers and exchanges.
Because of the reluctance of investors to hold debt obligations in registered form, almost all of these issues up till the end of the 1990s were sold in bearer form with coupons.
As mentioned in Chapter 6, today, Eurobonds are all in book-entry form. These bonds are not registered under the 33 Act and may not be offered or sold within the United States to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the 33 Act) except (a) to qualified institutional buyers (QIBs) in reliance on the exemption from the registration requirements of the 33 Act provided by SEC Rule 144A, (b) to persons in offshore transactions in reliance of Regulation S, (c) pursuant to an exemption for registration under 33 Act provided by Rule 144A (if available), or (d) pursuant to an effective registration statement under the 33 Act, in each of cases (a) through (d) in accordance with any applicable securities laws of any state of the United States. The bonds are registered in the nominee names of Depository Trust Company or of Euroclear and Clearstream. The bonds are initially issued as global bonds.
Rule 144A, under the 33 Act, exempts from registration the resale of privately placed securities to QIBs. Regulation S is available only for offers and sales of securities outside the United States.
The custodian function is also similar – safekeeping securities for its customers; collecting dividends and interest, which may be payable in different currencies; and buying, selling, receiving, and delivering securities upon instructions.
A bank’s role in such financings can vary widely. It may be trustee, issuing and paying agent, registrar, custodian, and/or common depository.