Debt capital markets: Engaging a third-party primary settlement agent

Over recent years, the bond market has seen a steady growth in bond issuers appointing non-traditional arrangers to structure their capital market issuances. This trend has helped drive overall market growth, but it also raises back-end infrastructure considerations – especially with the settlement and closing process.

Learn more about the role a third-party primary settlement agent can play in helping ensure your bond transactions proceed smoothly and efficiently.
 

A trend toward boutique arrangers

The corporate bond market continues to flourish, and as it does, more debt capital market issuers are looking to specialised firms to structure their debt offerings – initially at the smaller end of the market, but now in ever increasing transaction sizes. This trend is becoming commonplace with bond issuers seeking more bespoke service models and competitive fees.

Boutique arrangers and advisory firms offer a variety of benefits, including high levels of client service and attention. However, they’re often unable to run the full complement of necessary transaction mechanics – especially at the back-end – which can be expensive to set up, maintain and support, and are generally only offered via the large investment banks.

“Boutique firms certainly have expertise with structuring and placing the bonds,” says Hugo Smyth, vice president of business development for U.S. Bank Global Corporate Trust. “But often, they lack the infrastructure necessary to open and manage the accounts that facilitate the closing and settlement of those bonds into the ICSDs.”

This is where a third-party primary settlement agent can help.

What is a primary settlement agent?

The role of a primary settlement agent can be used when closing bond transactions into the clearing systems – Euroclear and Clearstream in Europe, and the DTC in the U.S.

“Settlement activities, including the delivery of bonds, are typically taken on by the arranging bank,” says Hugo.

In the majority of cleared bond transactions, there’s a lead arranger. The arranger generally coordinates the settlement activities and manages the distribution and settlement of the bonds to the subscribers.

“Instead of this approach, a third-party settlement agent can provide a similar function to the above, but adding flexibility to the transaction,” says Hugo. “Appointing an independent primary settlement agent adds the infrastructure and expertise into a transaction that a boutique arranger might lack on their own or for an arranging bank who is acting in an advisory capacity only. Essentially, it enables them to close bonds they might not otherwise be able to.”
 

How the relationship works

A third-party primary settlement agent works with a boutique arranger or advising bank and performs the settlement and delivery function normally handled by the lead arranging bank. In short, they have access to the required types accounts that facilitate the closing and settlement of bonds on the closing date, and manage the process.

“As a leading provider of services to participants in the debt-capital markets, we can facilitate your transaction by acting as settlement agent to support issuers, independent advisers, arrangers and investors,” says Hugo. “Serving as settlement agent, we act between the issuer and investors, and work with Euroclear and Clearstream (the ICSDs) and DTC to assist in the payment of closing proceeds to the issuer and transfer of securities to investors.”

What to consider in a third-party provider

There’s a significant level of infrastructure and expertise required to set up and run the settlement process, leading some organizations to decide if this is a process they want to provide.

“At U.S. Bank, we have the experience and expertise to do all necessary due diligence related to these transactions, so we’re well positioned to handle this role where other banks might shy away,” says Hugo. “We offer these services in conjunction with the paying agent and the common depository, and we’re very willing to look at a broad variety of market structures working with regulated counterparties.”

There can also be significant cost-savings advantages to bundling services with a third-party provider.
 

Benefit from our service offering

At U.S. Bank, our goal is to enable issuers and their advisors to stay focused on structuring and distributing while we handle the closing and settlement.

“We’re an experienced provider of settlement and agency services, a highly-rated financial institution and a highly independent agent – free of any conflicts of interest,” says Hugo. “We don’t have any arranging capacity in Europe. We're not an originator or arranger of bonds. We're an independent, neutral counterparty.”

Our London and Dublin-based team provide significant value to clients through our detailed operational knowledge across all types of debt transactions. We have the infrastructure and expertise to provide delivery and settlement services with support that includes:

• Applying for ISIN codes directly from the ICSDs/DTC
• Liaising between the issuer, transaction counsel and ICSDs/DTC to agree on governing documentation
• Monitoring all trades for breaks and liaising with trade counterparties to facilitate settlement
• Facilitating payment from investors to the issuer
• Settlement and distribution of securities either “Free of Payment” or “Delivery versus Payment”

For more information about our European trustee solutions, visit our website or contact Hugo Smyth at hugo.smyth@usbank.com.