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A debenture trustee is a person or entity that serves as the holder of debenture stock for the benefit of another party. When a company is looking to raise capital, one method of accomplishing this is by issuing stock as a form of debt with the obligation to repay the debt at a specific interest rate. The trustee serves as a liaison between the company that issued the debentures and the debenture holders that are collecting interest payments.
When lending money through a debenture offering, an investor will receive a debenture certificate entitling him or her to a particular sum of money and a specified interest rate. As investors do not receive an individual bond for their investments, their loans are really a small portion of one large loan. This can be extremely risky in the event of a default as the smaller debenture investors may lose their entire investment. As a result of this, a debenture trustee is appointed when debenture stock is issued to a large number of investors.
When a large amount of debenture stock is issued, the company issuing the stock may be required to use its property as collateral. In this scenario, the property is mortgaged to the purchasers of the debentures and the deed is placed in a trust. The debenture trustee serves are the official representative for the debenture investors and is responsible for liquidating the collateral of the trust in the event that the company defaults on its debentures.
The benefits of using a debenture trustee are that a professional trust company will have extensive experience with this form of investment structure and will know what information is needed from the issuing company in order to make an informed decision about the debenture investment. The trustee will also be able to determine if a company is in compliance with the terms and agreements set forth by the debenture offering. The company issuing the debenture also benefits from using a debenture trustee in that it only has to work with one person as opposed to the hundreds of investors who purchased its debentures.
The powers and duties of a debenture trustee will vary with each transaction. Generally, the deed will contain a variety of parameters specifying the power, duties, and responsibilities of the trustee. Although the rules and regulations surrounding a debenture trustee will vary from country to country, there are clear benefits to using a trustee when dealing with a debenture offering.
What is the difference between a debenture trustee and a company trustee?
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