Stephen Norton, B.Sc, Chairman, Loan Capital Committee
(From Issue 8,July 1999)
An important issue currently confronting loan capital trustees is the provision of certificates by auditors confirming adherence by issuers to certain financial covenants. The `big five` firms of auditors have unilaterally decided not to produce such certificates for the benefit of trustees even though this has been accepted practice for many years, upon the basis that their contractual relationship is with the issuer and not with the truste Regrettably, the step has been taken without prior consultation with either trustees, issuers or institutional investors. Where certificates are addressed to the directors of the issuers, they often specifically state that whilst copies may be provided to trustees, they may not place reliance upon them. Auditors have also requested that trustees should enter into letters of engagement, and have sought to impose limits on their liability.
This stance causes difficulty for both new debt issues and existing trusts; it is the view of members of the Loan Capital Committee that they should not place reliance upon certificates which are not addressed to themselves, or enter into letters of engagement, or accept limits on liability by the auditors concerned. Typically trust deeds contain language to the effect that companies should ‘use all reasonable endeavours to procure the auditors to furnish to the trustee such certificates, reports or other information as the trustee may from time to time reasonably require in connection with any calculation or matter arising from these presents’; if the trustee is unable to accept an inappropriately worded certificate then the onus falls back on the issuer to deal with the matter. Further, deeds often preclude the issuer from doing certain things, such as issuing further stock to purchase shares, without the provision of an auditors certificate. In such circumstances it could consider convening a meeting of holders to agree amendments to the trust deed such that provision of the `new` form of certificate would suffice, but this is potentially a very costly exercise to address a simple matter. Alternatively trust deeds generally provide that where an issuers auditor is unable or unwilling to give the certificate then a separate firm approved by the trustee may be appointed to do so.
However, whilst firms in the `second tier` of auditors outside of the `big five` are prepared to issue certificates duly addressed to trustees – and indeed this represents an important potential source of new business for them – this also imposes an additional layer of costs upon the issuers themselves.
One member of the Loan Capital Committee has taken advice from Counsel, and has been advised that the matter is essentially one of construction, and that it is a basic rule of construction that a document is construed with regard to the practice and expectation of the parties at the time it was entered into. Accordingly, certificates which do not correspond with the form of certificate given at the date of the relevant trust deed do not comply with the trust deed – and a trustee would be in breach of trust if it accepted them. In addition it is inappropriate for trustees to enter into letters of engagement because they seek to set out the work the auditor will do to give the certificate whereas the concept is to put this responsibility onto the expert.
The situation is still some way from being resolved and trustees are engaged in meetings with issuers anxious to avoid being in breach of the terms of the trust deed, or wishing to carryout transactions. Both trustees and issuers remain concerned at the stance being taken by auditors who have previously been content to deal with the matter to the satisfaction of all parties concerned. For obvious reasons issuers are reluctant to commit to additional expenditure to address an issue which is not of their own making. For trustees, pending the receipt of further advice, the message is to proceed with care and on advice.
The Loan Capital Committee would welcome contact from other trustees who have been obliged to confront this issue, which is likely to provide a key item of debate at its forthcoming meetings.
Please contact me by telephone on 020 7606 5451, by letter at :-
The Law Debenture Trust Corporation plc
95 Gresham Street,
London EC2V 7LY
or by email at Stephen.Norton@LawDeb.co.uk
Chairman, Loan Capital Committee
(Stephen writes in a personal capacity)