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:
- Acting in the interest of bondholders and the general public by administering certain terms of the loan according to the bond indenture (i.e. a compliance agent)
- Acting as a transfer agent, keeping records of bond ownership and transfers.
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.
