The SiLAS 2010 conference featured lively discussion of the role of trustees in Latin American transactions. In Mexico, especially, it almost seemed as if trustees were out to lunch while flows were diverted from Metrofinanciera's bridge loans deals, which inevitably led to distress.
Boris Otto, a partner at Chadbourne & Parke Mexico, argued that there is not an "adequate mechanism" for bondholders to identify each other when a deal begins to unravel.
"How can a bondholder exercise its rights when it can't identify the others to build a monopoly?" Otto said.
One possible solution might be a more active role for the trustee.
In a telling anecdote, Michael Morcom, director of agency and trust sales at Citi, told how monoline insurers were quick to protect their interests when Kazakh banks began defaulting on their vanilla debt in the face of severe economic pressures.
The bond wrappers had substantial exposure to Kazakh deals backed by diversified payment rights (DPRs). Morcom, who was a vice president at Ambac, spoke from experience, as the monoline had wrapped tranches in deals from BTA Bank and Kazkommertsbank (KKB).
"In Kazakhstan, we had to jump into the pilot's seat," he said.
Both KKB and BTA ended up paying in full, after triggers accelerated the deals. The only outstanding Kazakh DPR bond, by Alliance Bank, is still amortizing (see ADB Q&A in ASR, May 2010).
This experience showed that a single controlling investor or small group of controlling investors can identify a problem with a deal and immediately tackle it.
"When there's a dispersion of investors it's difficult," Morcom said. "I think people might want the trustee to take that role."
But this naturally raises the issue of legal liability for the trustee, participants said. A trustee would certainly not want to raise the specter of a lawsuit were it to act on investors' behalf.