ISA Position 108-5: What Bond Trustees Must Do Beyond Company Data

Following a broad audit conducted by the Israel Securities Authority (the “ISA”) of the conduct of bond trustees in relation to companies that have issued bonds to the public, on September 22, 2024 the ISA published Legal Position No. 108-5 (the “Position”). The Position is intended, among other things, to address the duties applicable to corporations that have issued bonds to the public, including their duties toward bondholders and toward the trustee for bondholders.

Can a trustee rely solely on the company’s representations?

As a rule, a trustee may rely, among other things, on representations and confirmations provided by the company, on a review of the disclosure in the company’s reports, or on professional opinions submitted to it by the company. That said, under the Position, in certain cases this will not be sufficient, and in order to fulfill its duties the trustee will be required to take additional, active and independent steps that are not dependent on the company’s representations (such as obtaining supplementary information, requiring detailed reasoning, and independently reviewing representations, opinions, and valuations). Accordingly, companies and trustees may not exempt trustees from these duties (or from any other duty) by way of exceptions set out in the trust deed. For example, the parties may not provide in the trust deed that the trustee will rely solely on the company’s representations and confirmations and will be exempt from taking any further action.

What are the key areas covered by the Position for issuing companies?

The Position highlights several points that are relevant for issuing companies:

• Changing or releasing collateral provided to bondholders – under the Securities Law, collateral provided for the benefit of bondholders may be changed through a mechanism set out in the trust deed that reasonably ensures bondholders’ rights are not harmed as a result of the change. A significant portion of trust deeds provide that such a mechanism will be based on a valuation of the replaced and replacing assets; the same applies where the trust deed sets an LTV financial covenant. Under the Position, in these cases the trustee must, at a minimum, review the data and methodology underlying the valuation and, where appropriate, approach the company for further explanations.
• Reviewing the company’s compliance with financial covenants – as a rule, on each date set in the trust deed for testing the company’s compliance with financial covenants, the trustee must review that compliance, including verifying that the company’s calculation is made in accordance with the deed and the definitions of the covenants, and, where required, performing an independent calculation based on available and additional information from the company. Where the company seeks to change how a covenant is calculated, the trustee must review the change, obtain the company’s reasons for it, and assess whether the change is consistent with the covenant’s definition in the deed, including the reasonableness of the company’s proposed interpretation, consulting outside experts if necessary.
• Calculating the early redemption amount – the trustee must verify that the early redemption amount is calculated properly and in accordance with the trust deed, and as a rule must perform an independent calculation of that amount. Where there is a discrepancy between the trustee’s calculation and the company’s, the trustee must raise it with the company, provide its own calculation, and, if necessary, obtain the company’s calculation and an explanation for the discrepancy.
• Approval procedures for transactions with controlling shareholders – where the company has undertaken in the trust deed to bring certain transactions with its controlling shareholder for approval by the bondholders’ meeting, the trustee must examine whether such transactions are in fact being brought to bondholders as required under the deed. Under the Position, where a company chooses not to bring a transaction for bondholder approval on the grounds that it is not an extraordinary transaction or falls within another exception under the deed, the trustee must be proactive and, where necessary, independently review whether the transaction is in fact extraordinary or whether the company meets the conditions of the exception – for example, by requesting the company’s reasoning for concluding that a given transaction is on “market terms.”

What additional points does the Position address?

Beyond the above, the Position also addresses:

• The trustee’s duty to examine whether a change a company seeks to make to the trust deed amounts to a “material debt arrangement” (as defined in the Insolvency Law)
• The need to establish mechanisms in the trust deed requiring the issuing company to provide the trustee with all documents and data it needs to fulfill its duties
• The need to include detailed reasoning for a trustee’s decision to convene a bondholders’ meeting on less than 7 days’ notice