A security trustee holds securities in trust for a group of creditors in financial transactions. Debtors may place various assets in trust to secure a credit transaction, and the trustee manages the trust on behalf of both the debtor and creditors. If the transaction goes well, the trust is dissolved, but if there is a problem, the trustee can liquidate it and distribute the proceeds to creditors. Financial institutions or private companies often act as security trustees.
A security trustee is a person or institution that holds securities in trust for a syndicate of creditors in a financial transaction such as a securitization. There are several reasons why debtors may choose to use a trust to raise capital and other types of financial transactions. Most often, this approach is used when there are so many creditors involved that it would be impractical to give each one an interest in individual securities to secure the debt.
Debtors may place several different assets in trust for the purpose of securing a credit transaction. This may include real estate titles and other assets, investments, bank accounts, etc. The security trustee is responsible for managing the trust and managing the contents responsibly on behalf of both the debtor and creditors. Each of the creditors involved in the transaction has a financial interest in the trust, rather than in the individual assets.
If the transaction goes smoothly and the debtor discharges the debt, the trust is dissolved and title to the contents is returned to the debtor. If there is a problem, the security administrator is empowered to execute the trust, liquidate it, and distribute the proceeds to creditors. Creditors receive shares according to their interests; Someone who owns 50% of a trust, for example, would get half of the proceeds from the foreclosure sale after fees have been paid, including fees to the security trustee.
For creditors, there are advantages and disadvantages to being involved in a syndicate with a security administrator who owns the assets. This may be safer in some settings, as the servicer can act very quickly to address debt non-payment and other issues. On the other hand, having to share interest with other creditors can reduce the amount of payment if the trust has to be liquidated. The security trustee is responsible for ensuring that shared interests do not exceed 100% of the trust and for keeping the assets physically safe while the trust is in effect to prevent loss, but the trustees cannot control market forces and the value of Trust assets may fall over the life of the trust.
Secured transactions can be very large and it is not uncommon to see financial institutions or private companies acting as security trustees, rather than individuals. Managing a large trust can require a range of skills in addition to the services of support staff to monitor the trust and stay informed of any developments that may impact the trust or the relationship between debtors, creditors and trustees.
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