A security trustee is a person or institution who holds securities in trust for a syndicate of creditors in a financial transaction like a securitization. There are a number of reasons why debtors may choose to use a trust for raising capital and other types of finance transactions. Most commonly, this approach is used when there are so many creditors involved that giving each an interest in individual securities to secure the debt would be impracticable.
Debtors can put a number of different assets in trust for the purpose of securing a credit transaction. This can include titles to real estate and other assets, investments, bank accounts, and so forth. The security trustee is responsible for administering the trust and managing the contents responsibly on behalf of both the debtor and the creditors. Each of the creditors involved in the transaction has a financial interest in the trust, rather than in individual assets.
If the transaction goes smoothly and the debtor discharges the debt, the trust is dissolved and title to the contents is returned to the debtor. If there is a problem, the security trustee is empowered to foreclose on the trust, liquidating it and distributing the proceeds to the creditors. Creditors receive shares in accordance with their interests; someone who holds 50% of a trust, for example, would get half the proceeds of foreclosure sale after fees have been paid, including fees to the security trustee.
For creditors, there are advantages and disadvantages to being involved in a syndicate with a security trustee holding the assets. This can be safer in some settings, as the trustee can act very quickly to address nonpayment of debt and other issues. On the other hand, having to share interests with other creditors can reduce the amount of payout if the trust has to be liquidated. The security trustee is responsible for ensuring that the shared interests do not exceed 100% of the trust and for keeping the assets physically secure while the trust is in force to prevent losses, but trustees cannot control market forces and the value of assets in trust may fall over the lifetime of the trust.
Secured transactions can be very large and it is not uncommon to see financial institutions or private firms acting as security trustees, rather than individuals. Managing a large trust can require a number of skills in addition to the services of support personnel to monitor the trust and stay apprised of any developments with a potential to impact the trust or the relationship between debtors, creditors, and trustee.