QUE: Are Trustees only responsible to the Federal, State and Corporate Bodies in the area of Bond issuance?
ANS: No, Trustees do much more than that. For instance, they also play a fiduciary role, protect the interests of the Bondholders in a Bond Issuance, ensure effective management of the Sinking Fund account. We are also answerable to the Regulators.
QUE. What is the role of the Trustee in case of any default in a federal bond?
ANS: It is very rare for a Federal Government of any nation to default. It is not impossible, though as we have seen in the case of Greece and Venezuela. Please note that Corporate Trustees are not parties to Federal Government Bonds. However, in the case of an Issuance backed by the full faith of the Federal Government, the Trustee would have recourse to the Federal Government to make it good.
QUE. On valuation in assets protection, how is it done? What category of valuers should do the physical assets’ valuation?
ANS: No, SEC does not regulate Valuers. However, some Financial Institutions have a list of Valuers that they trust their judgment and use.
QUE. With the growing popularity of private bonds not directly under the purview of the SEC, what are your recommendations to ensure the necessary protection of individuals.
ANS: It is advised that Investors are very meticulous as to where they are investing their funds. Investors should ensure adequate due diligence before investing.
QUE. Can a company use the asset of one of its subsidiaries as a collateral?
ANS: Yes, it can. It will be a tripartite arrangement, but the Company releasing the asset must pass a resolution to that effect.
QUE. If a Bank issues an additional tier 1 capital Sukuk, will this issue be regarded as equity or debt since the proceed will be co-mingle with other equity capital of the bank?
ANS: No. The operations of a Sukuk Issuance are distinct from an equity or debt Issuance. Sukuk is either asset-backed or asset-based and the assets acquired with proceeds of Sukuk issuance belong to the Sukukholders until maturity. However, CBN guidelines regarding capitalization should be followed.
QUE. How do bonds generate income for investors?
ANS: Investors buy bonds either directly or by subscribing to a mutual fund that invests in Bonds with the aim making profit from the coupon/interest earned on the bonds. Bonds are especially profitable when they are coupon/interest-paying as coupons are payable on fixed dates and becomes a steady source of passive income.
QUE. Can a Trustees’ services be useful for securities lending?
ANS: Yes, it can. Trustees hold a charge over the borrower or issuer’s assets on behalf of and for the benefit of investors/lenders. Trustees will usually act to protect the assets and may realize same in the event of default to meet obligations to the lenders.
QUE. Please share your thoughts on the application of the Withholding Tax to Mutual Funds based on the recently expired tax waiver on Subnational Bonds to Companies bearing in mind Mutual Funds are Trusts?
ANS: The Government gives directions to the economy. The restriction on WHT was meant to encourage investors to embrace capital market instruments. The Government attention seems to have shifted to tax drive, hence practitioners may have no option at this period than to comply.
QUE. What’s the place of pension commission (PENCOM) in the registration process?
ANS: PENCOM regulates the Pension Administrators and also issues approvals to invest in some issuances that meet its criteria before the operators are allowed to invest in such instruments. It does not play any role in the registration process of a capital market debt issuance.
QUE. We are currently observing trends where commercial papers are backed by securities. Does this not defeat the purpose of a commercial paper which is supposed to be hinged on the good faith of the Company?
ANS: In our jurisdiction, Commercial Papers are different from Bonds, but in some jurisdiction it is considered as a Bond. Commercial Papers in Nigeria are to be issued based on the investors’ trust in the Issuer’s fundamentals. Issuing a Commercial paper backed with assets may connote the need to assure the investors of the safety of investment and capacity to repay. We advise investors to do proper due diligence before subscribing to any instrument.