A bond issue will require either a fiscal agent or a trustee.
If a fiscal agent is appointed, a Fiscal Agency Agreement will be agreed. A fiscal agent is designated by the issuer, usually a bank, and functions as the issuer's representative, to whom it is accountable for its obligations and responsibilities. In Argentina during a default, there was no trustee under the fiscal agency agreements to act for investors and each bondholder had to sue Argentina individually in New York courts. This created chaos as some investors refused restructuring and kept suing while other accepted the exchange offer at a steep discount. The result was litigation dragged for more than a decade.
If a trustee is to be chosen, a Trust Deed will be established to constitute the trust and designate the trustee, along with a Paying Agency Agreement. However, a recurring issue with trustees is the potential refusal to take enforcement action until bondholders provide indemnities and funding. When Lehman collapsed, trustees faced accusations of conflicts of interest; being too slow to enforce rights because they wanted to protect their wider banking relationship with the issuer.
A trustee is designated to serve the bondholders and has fiduciary duties towards them. The presence of a trustee allows the issuer to engage with a single representative for all bondholders, rather than addressing each bondholder individually.
The rationale for appointing a fiscal agent predominantly benefits the issuer rather than the bondholders. In Greece local bonds were under fiscal agency agreements. To restructure, Greece changed its own law to introduce collective action clauses (CAC’s) retroactively, forcing holdouts into the deal. International law bonds with trust deeds were harder to restructure because the trustee had to respect bondholder protections showing the difficulties and importance of the legal structure behind bond issuance.
Even though legal counsels will work towards a Fiscal Agency Agreement that has a solid structure ensuring smooth administration and clear limits on the agent’s role and for the Trust Deeds to focus on balancing issuer flexibility with investor protections especially around default issues and enforcement, in practice, issuers difficulties frequently arise because of regulatory shifts which require constant adaptation. Standard clauses that are often copied in these agreements are subject to Court’s interpretation as seen in “pari passu” clause litigation against Argentina leaving investors weak and fragmented.