The Lithuanian bond market has clearly been booming of late. Over the past year alone, we have seen dozens of new issues, most of them with the placement results sending the same signal: demand exceeds supply, issues are successfully placed, and investors are active and looking for attractive returns. This does not come as a surprise, however – for some investors, bonds seem to offer a more attractive alternative than today’s rather volatile equity markets or traditional bank deposits. That said, we have witnessed a few problematic cases that have surfaced publicly, reminding everyone that return comes with risk – and at the heart of how that risk is handled stands the bondholders’ trustee.

“We can see that investors are active and looking for more attractive returns. But at the same time, the market has returned to some fundamental questions: how do protection mechanisms work? What happens when the obligations set out in the issue documents are breached? How quickly are decisions taken?” says Eva Suduiko, partner and attorney-at-law at COBALT.

Who is the bondholders’ trustee and when is appointing one mandatory?

A bondholders’ trustee is a person who represents all bondholders and protects their interests in relations with the issuer – the entity issuing the securities – as well as with third parties. Put simply, the trustee is the bond investors’ “collective voice” and organised representative, especially when things become complicated.

In many cases, the appointment of a trustee is mandatory, particularly for publicly offered bond issues. Sometimes issuers appoint a trustee voluntarily, even when there is no strict legal obligation to do so – this is often seen as an additional sign of commitment toward investors. However, there are also exceptions where no trustee is required, according to Rimgaudas Pazniokas, partner at UAB Audifina:

“For example, this is the case when the issue is intended only for professional investors, when the total value of the public offer does not exceed EUR 1 million over a 12-month period, or when the nominal value of one security or the minimum investment per investor is at least EUR 100,000.”

The role of trustee in “normal times”: active but invisible

To many investors it might appear that the trustee “steps in” only when something goes wrong. However, the partner at Audifina stresses that the trustee’s role is always active – it is just largely invisible as long as everything is running smoothly.

“Normally, when everything is on track, the trustee maintains regular contact with the issuer, monitors whether the issuer is complying with the terms and conditions of the issue, including financial covenants, and checks whether other obligations to bondholders are being fulfilled,” says R. Pazniokas. “As long as everything is going according to plan, investors simply do not see this work – and that is a good sign. However, it is precisely this ongoing monitoring that usually allows trustees to be the first to identify irregularities and take measures to address them.”

What problems typically arise and what can a trustee do to address them?

In practice, a number of most common problems can be observed.

“There can breaches of financial obligations set out in the bond issue documents– for example, the issuer’s financial performance indicators no longer meet the agreed thresholds. Less frequently, there may be delays in interest payments, and more rarely – difficulties in redeeming the bonds from investors at maturity. When red flags start to show, it is important that the trustee strictly follows the course of action defined by law and the specific issue documents. Trustees have limited leeway in what they do – they must operate within a clearly defined framework,” says attorney-at-law E. Suduiko.

According to her, the trustee first requests information from the issuer, assesses the performance of obligations and, where necessary, triggers decision-making – convenes a meeting of bondholders, provides recommendations regarding amendments to the terms of issue or refinancing. In extreme situations, the trustee may exercise the rights of a pledgee or mortgagee or bring a claim before the court. It is at such bondholder meetings that the trustee becomes most visible, as it is the trustee who takes the initiative to address critical issues: whether to negotiate, whether to change the terms, or whether to initiate legal action.

It is important to note that precisely in such situations, when questions arise whether obligations are being fulfilled, the trustee’s workload and costs increase. Paradoxically, the trustee has the largest workload when the issuer is under the greatest financial stress, given the need for more frequent meetings, additional negotiations, and more intensive management of documentation and information flows. Therefore, R. Pazniokas says that it is crucial to agree clearly on the trustee’s remuneration and cost compensation mechanism at an early stage – already in the issue documentation – this helps avoid disputes at critical moments and speeds up decision-making.

Nevertheless, the trustee’s being active does not guarantee the [desired] outcome – the final result depends not only on the trustee’s actions but, above all, on the approach the issuer adopts. As the trustee’s representative points out, in practice most issuers cooperate to work out a solution, while dialogue is usually avoided only when there are no realistic options in sight for the issuer. For this reason, when assessing a bond issue, investors should look not only at the coupon rate but also consider the issuer’s reputation, transparency and attitude towards investors –factors largely determining whether decisions will be taken in a timely and constructive manner.

Finally, whether decisions are adopted and implemented on time also depends on investors’ own engagement. Although the protection of investors’ interests is a topic much discussed about, investors themselves do not always actively participate in the process.

“Experience shows that it is often difficult to achieve high investor engagement in processes, with engagement levels typically increasing only when problems with bond redemption are already there. Low engagement has a very concrete consequence – decision-making is delayed by the need to convene repeat meetings. In critical situations this translates into lost time and, in some cases, lost opportunities,” says R. Pazniokas.

Access to information: how do investors get updates?

A natural question arises – perhaps investors simply do not receive information in time, and that is why problems arise? According to the attorney-at-law at COBALT, no individual notices are normally sent to investors, which is why anyone investing in bonds should actively follow official information channels to stay updated rather than wait for a personal email or expect any other form of attention.

“In practice, information for investors about the issue and its progress is usually published on the trustee’s and the issuer’s websites. If the securities are traded on the Nasdaq exchange, relevant information is also published there. In addition, further information channels may be specified in the issue documentation,” says E. Suduiko.

Bankruptcies and restructurings: what do extreme scenarios look like?

Since the bondholders’ trustee regime was introduced in Lithuania less than a decade ago, there have not yet been many high-profile cases. Most of the public attention in 2024 went to the bankruptcies of the logistics and transport company Integre Trans and the beauty and cosmetics wholesale company BigBrand, as well as the restructuring of the organic food producer AUGA group.

Practice is still evolving, and the regulation in place is not yet fully comprehensive, but typically in such situations the role of the trustee diminishes:

“In the event of insolvency, the trustee provides information about individual investors to the insolvency administrator, after which point investors participate in the process directly. The trustee usually remains involved as the holder of collateral (where the bonds were secured for the benefit of the bondholders by a pledge or mortgage) and arranges settlements with investors from the proceeds of enforcement,” says R. Pazniokas.

In either case, there is no clear-cut answer as to whether investors will recover all their money in such crisis situations. Even where there is security in place – a pledge, mortgage or similar – the final outcome, i.e. what portion of the invested amount will be recovered, depends on the issuer’s actual financial situation and its ability to continue as a going concern, historical performance (revenues, profitability, cash flows), the ability to raise new financing, as well as the actual value of the pledged assets and the prospects for their realisation.

What should investors consider before investing in bonds?

Recommendations from both the trustee and the lawyer are, as a first step, to assess the issuer itself – its reliability, historical financial performance and whether its business model is clear and consistent (for example, whether the business is profitable and sustainable, whether revenues and profits are stable, and whether the level of debt and the growth plans can be viewed as reasonable).

“It is no less important to realistically assess risk: a higher coupon rate usually involves higher risk,” notes E. Suduiko. “The next element is security: is there collateral, what is its quality and how realistically would it be enforced in an adverse scenario? Finally, the issue documentation: the provisions of the terms and conditions are not a mere formality. They define the key risks, specify what constitutes an event of default and how problematic situations will be handled.”