Selecting the Right Depositary Bank and Collateral Agent/ Trustee for Your Deal

Valerie Crain, Vice President, Union Bank, N.A.

When choosing a Depositary Bank and Collateral Agent to successfully administer your project finance transaction, look for a Depositary Bank and Collateral Agent that understand the structure and purpose of your deal over its lifetime, bring focused technical review during document drafting without causing delays or interruptions, and that will proactively maintain communication with the active parties in the transaction.selecting-depository

Because of the intermingled nature of the Depositary Bank and Collateral Agent roles, the same institution is usually appointed to manage both allowing for seamless processing. It is important to ensure the institution understands the distinct differences between the two roles and their functions:

The role of the Depositary Bank – This entity is charged with the financial administration necessary to  allow the project to happen in accordance with the transaction’s governing agreements. From opening and maintaining all collateral accounts and crediting funds appropriately to understanding the phases of the project, their corresponding flow of funds, as well as the timing and mechanics for processing transfers from reserve accounts and/or draws on letters of credit to meet any deficiencies connected with certain payment obligations and requirements connected with these deficiencies.

•  The role of the Collateral Agent – The Collateral Agent is tasked with monitoring and administering the project and its finances on behalf of the secured party  under the agreements. In order to do this successfully, the Collateral Agent must review all pertinent agreements in order to understand the immediate and potential impact of each on the overall project. [The intent here was to focus on how each agreement affected the logistics of the deal, but it now wrongly says that we are reviewing to understand the agreements themselves.]  The Collateral Agent should be able to immediately participate in technical discussions without causing any delays, interruptions to documentation deadlines, or introducing previously unheard of considerations that could impact the scope of the project. While most parties in a project finance transaction have a specific area of expertise such as the independent engineer or sponsor, the Collateral Agent needs to have a broader level of expertise that encompasses the entire framework of the project. [Here too I think this has become over-reaching.  Our expertise is abstract, administrative and documentary, right?]  Last, since the assets of a project are a key consideration on the part of any secured party in making a decision to invest in the facility, all assets of the project are pledged to the Collateral Agent as security for the benefit of the secured party.

The Depositary Bank and Collateral Agent are usually parties to the project’s agreements so that identifying and understanding any cross-references is natural, which plays an essential part in the proper administration of the project finance transaction. The inability or failure of the Depositary Bank and/or Collateral Agent to recognize and act on any cross-references could cause serious harm to the project and negatively impact the borrower’s ability to accomplish project deadlines. Additionally, the two roles are ongoing resources for the borrower. After the deal has been finalized and the agreements executed, the Depositary Bank and the Collateral Agent remain to help the borrower navigate the project’s various governing agreements. They provide guidance on accessing funds, when to submit disbursement requests, and delivery of required compliance items such as insurance certificates and UCC continuation statements. To best serve the interests of and be a knowledgeable resource for the borrower the Depositary Bank and Collateral Agent must employ an experienced staff dedicated to providing exceptional service using systems to facilitate the successful administration of a project finance transaction.

There are many challenges to any large project/transaction – knowing what to look for, and hiring the Depositary Bank and Collateral Agent that is right for your project can be instrumental to its success.

Look for a Depositary Bank and Collateral Agent that understands the structure of your deal and its corresponding responsibilities based on the project’s agreement and any ancillary agreements to which they are signatories. Engage a Depositary Bank and Collateral Agent experienced with reviewing and negotiating all agreements, and who will maintain communication with the active parties in the transaction on various events and issues. Finally, ensure both the Depositary Bank and Collateral Agent maintain a contingency plan to facilitate timely and accurate processing of payments as directed by the borrower in accordance with the governing agreement(s) in the event of an emergency.

Author Information:
Valerie Crain
Vice President
Union Bank, N.A.
1251 Avenue of the Americas, 19th Floor
New York, NY 10020
Direct Phone Line: 646-452-2012
Direct Fax Line: 646-452-2000
Email: [email protected]
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