With an escalating trade war and precipitous plunges in interest rates heightening global macroeconomic uncertainty, Stephen Hessler shares why its high time issuers and investors take stock of their corporate trust services and how they can help to weather an impending storm
It’s been almost 11 years since the Lehman default precipitated the global financial crisis. Yet here we are today, facing trade wars and further interest rate cuts. In these tumultuous times, reminiscent of the crisis, it can useful to recall what it was that corporate trust providers did during that period, which helped create certainty for issuers and investors so that the lessons learned are not forgotten.
Key to this reckoning is asking whether corporate trust service providers have the technology and people to help their clients succeed for the long term across business cycles, especially during the downturns? During periods of low corporate defaults, it is easy to become complacent that all is well and the service you are receiving is good enough. However, this complacency masks the issues lurking beneath the surface, and it is best to address those issues when markets are calm and not just when they are going through a storm. Just as we grab an umbrella and batten down the hatches when dark clouds are on the horizon, we must do the same when market conditions take a turn for the worse. Let’s take a look at some factors to consider as we weather this tumultuous period in the markets.
Teams and technology
For many institutions, while technology is looked upon as the panacea for all problems, it is the corporate trust provider that has skillfully blended its people with its technology that will provide the partnership necessary for clients’ long-term success. Over time, there will be improvements in the way particular corporate trust services are provided – online reconciliation tools, live waterfalls and hypothetical trade testing for example. However, when the next market downturn occurs, it is the people behind these online services that will be able to guide their clients through it.
For an experienced corporate trust team that went through the credit crisis of the late 2000s, this means getting reacquainted with the Event of Default sections of the governing documents. They would be able to leverage their years spent before, during and after the event making sure the agreements made between the deal parties were properly adhered to. Importantly for more recently established institutions, the corporate trust teams that went through that experience will be there to guide them through their options should the unthinkable happen to one of their transactions.
Form over function
The organisational structure of a corporate trust business is another factor to consider in how well they will perform over the long term. For example, if positions are structured to oversee only one aspect of the overall service that is being provided, such as reconciling cash or only producing reports, there will be a stunted understanding and a complete lack of historical context of the full transaction. This will prevent an efficient review of a transaction’s status in times of stress and potentially lead to inaction when decisive action is actually what is called for.
Vertically integrated corporate trust structures, on the other hand, encourage a broader view and understanding of the service being provided to clients. By administering a transaction through its warehouse, the issuance of its notes to the investors, and on to its maturity, gives a holistic view of the transaction and enables the provider to be able to answer what they did and when. Ultimately, a holistic view leads to entrepreneurial thoughts that encourage more efficient ways of providing a service, and the client and investors benefit from that service provider’s experience. Additionally, a vertically integrated corporate trust firm that actively manages the workload of its team members ensures great client service and a stronger partnership with its clients, especially when it is most called for.
When markets get rough, as we have seen, long-term experience is important. Another factor to consider is the culture of the business in which that experience operates. Is the culture toxic and has there been turnover, particularly at the senior level of the organisation? Experience needs to be compatible with culture. In sports, how many times have we seen a high-value acquisition join another team, only for that team to fall apart and miss the qualifying tournaments. Thus, a firm that manages a culture that brings together, and keeps together, an experienced team, will enhance the partnership that corporate trust team has with its clients.
Lastly, experienced corporate trust teams have seen features of structured products come and go. Remember when Targeted Amortization Classes (TACs) of residential mortgage-backed securities (RMBS) were introduced in the early 1990s? Some of their features may stand the test of time, however, when we look at the applicable margin reset feature, or the modifiable and splittable/combinable tranches (MASCOTs) of today’s collateralised loan obligations (CLOs), will they be mainstream features in five years, or an idea that lost investor interest? And when the London interbank offered rate (LIBOR) becomes the secured overnight finance rate (SOFR), or another alternative reference rate, experienced corporate trust providers, and their people, will be there to guide their clients through the evolution.
In conclusion, with storm clouds on the horizon, now is a good time to review your corporate trust service providers to ensure they have the right blend of technology and people. Dig beneath the surface to truly understand how, and by whom, that service is going to be provided. Being prepared means weathering the storm and setting up for long-term success!
Stephen T. Hessler is a Director, Corporate Trust Sales, at Deutsche Bank
Your corporate trust partner checklist:
- Technology: does your provider offer online services such as reconciliation tools, live waterfalls and hypothetical trade testing?
- Expertise: does its people have the knowledge of documents governing agreements and can they ensure those agreements are properly adhered to?
- Organisational structures: does your provider have the appropriate positions to ensure that the overall service is being adhered to such as cash reconciliations and producing reports?
- Vertically integrated structures: do they have a vertically integrated corporate trust structure and a view of the transaction enabling them to answer what they did and when?
- Cultural compatibility: does your provider have a healthy organisational culture with minimal turnover?
- Products expertise: do they have experience in managing all features of structured products including RMBS, CLOS?
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