Saturday, March 15, 2014

Tough times for trustees in Malaysia

The recent Federal Court decision in the Pesaka Astana bonds case is said to have "rattled the bond market" in Malaysia.

The case involved many issues centering about the duties and responsibilities of the lead arrangers for bond issuances and, equally importantly, the role of trustees in relation to the protection or, "ring fencing" of assets used to secure the bond issuance.

One of the important issues in the case involved the apportionment of liability between the lead arranger and the trustee in relation to the losses suffered by bondholders.

Lead arrangers are off the hook?

The Federal Court decision gave much weight to the cautionary notice contained in information memoranda (IM) and prospectuses. The Federal Court ruling appears to absolve and release lead arrangers from further responsibilities in bond issuances for so long as the cautionary notices are set out and highlighted in IM and prospectuses.

The implication of that ruling appears to put an onerous burden on bondholders to make their own detailed due diligence inquiries on every prospective bond issue.

In the complex and high-speed world of debt markets and capital markets the Federal Court ruling is well and truly a possible "spanner in the works" for the Malaysian debt and capital market.

How much weight to give IM?

Prior to the Federal Court ruling, the debt market practice would be for most bondholders to rely on the representations and advisory contained in IM issued by the issuing company but put together by the lead arranger and advisers.

The dilemma of prospective bondholders in the wake of the Federal Court ruling is, "How much weight do we give representations in the IM?"

This takes the contract principle of caveat emptor to a whole different level in the context of debt markets, in the form of IM and, with possible shockwaves to the capital markets, in the form of prospectuses.

Trustees bear the whole brunt of liability?

That said, what about the plight of the hapless trustee companies who are meant to be the custodians of secured assets in debt instrument issuances?

The risk profile for trustees to act as custodians for debt instruments just went to a completely different level; not in a good way. Actuaries will have their work cut out for them to calculate new liability levels of trustees.

In the matter of apportionment of liability here's the possible score at different stages of the Pesaka Astana bonds case-

Court                    Lead Arranger's liability  Trustee's liability

High Court                60%                                     40%

Court of Appeal        50%                                     50%

Federal Court              0%                                   100%