Trust Indenture - This is an effective device for corporate financing. When a corporation decides to borrow money from the investing public, it would be a most cumbersome procedure if the borrowing corporation were to execute a contract of loan with the numerous creditors. To handle this difficulty, a corporation executes an agreement with a trust entity which shall act in behalf of all these lenders.

The agreement executed is called a “Trust Indenture”. It usually sets forth the terms and conditions of the loan, lays down the restriction on the borrowing company as long as the obligations are outstanding, provides for the remedies the trustee may and should take in case the borrowing company defaults, and generally defines the rights and duties of the creditors, trustees and the borrowing companies.

Aside from authenticating the bonds as having been issued under a particular indenture, the trustee receives the lenders’ money from the underwriters and turns it over to the company either immediately or according to schedule in the indenture. It may also receive some money from the borrowing company sufficient in amount to pay interests and principal at maturity.

Mortgage Trust- Most indentures, so as to attract the investing public more effectively, impose a direct lien on the fixed assets of the company whereby the fixed assets of the company are mortgaged in favor of the trustee acting for and in behalf of the lenders. Because of this, additional duties are incumbent upon the borrowing company. This usually comes in the form of specific restrictions on the borrowing company to ensure that the mortgaged assets will not b impaired in value. The trustee receives specific periodic reports to see to it that the borrowing corporation is complying with its commitments. Sometimes the assets offered as security are equipment, real estate or simply blocks of shares of stock.

In both the above corporate trust arrangements, the trustee is bound to minister and attend to the property placed in trust as security. The trustee must see to it that the borrowing company complies with the terms and conditions of the trust indenture and, if necessary, take remedial steps to protect the lenders in case of the borrower’s default. Prior to any breach, the trustee simply holds the property as security for the benefit of the lenders.

Special Purpose Trust

A special purpose trust is an arrangement undertaken whenever a company wishes to gain the financial flexibility provided by an asset-backed securitization.

Securitization is the process of liquifying future income or future selling proceeds from an identified asset pool by selling the claims to these cashflows on a discounted basis. These claims are transformed into tradeable securities which can be redeemed by the issuing company or originator.

Securitization can offer companies the following advantages: The timing of cash inflows from operations is managed to match the schedule of financing requirements; the company incurs lower financing costs; the company is able to change the form of its assets allowing it to exploit developments in the financial markets and access to a wider range of investors; and, if an off-balance sheet structure is used, the underlying assets are removed from the originator’s balance sheet, thus freeing up capital for use in writing new business.

Assets that commonly lend themselves to securitization are Mortgages, Leases, Credit Cards, Trade Receivables, Employee Loans, and Auto Loans.

The special purpose trust issues the certificates evidencing claims to these cash flows and holds the underlying right to collect and distribute these cash flows as they mature.

In essence, the special purpose trust provides credibility to the securitization process. The special purpose trust represents a third party entity who protects the cash flows pledged to investors by removing it from the control of the originator.

Under the present rules of the Securities and Exchange Commission, the Trust Department of a financial institution is the Trustee of a special purpose trust.