What is a paying agent?
A paying agent – also known as a “disbursement agent” – is one who accepts payments from the issuer of a security and then distributes the funds to holders of the security.
Paying agent explained
Paying agents are typically a corporate fiduciary department of a bank or trust company that is appointed to make dividend, coupon, and principal payments to a securityholder on behalf of the issuer. When paying agents are used for shares, the agent receives dividends, which it then pays out to shareholders. For bonds, paying agents receive coupon payments, which they then remit to bondholders. When issuing bonds, the trust deed usually appoints a paying agent responsible for paying interest and principal. A paying agent acts as an intermediary in these transactions and receives remuneration for its services.
In bond issues where there is more than one jurisdiction, there will be more than one paying agent, one of whom will play a coordinating role. If it is not a fiduciary transaction, the coordinating agent role will be performed by the fiscal agent. If it is a trust agreement, the agent will be called the “primary paying agent”.
Key points to remember
- A paying agent accepts payments from the issuer of a security and then distributes those funds to holders of the security.
- Although paying agents work with all securities, including stocks, they are widely used with debt securities, such as bonds.
- The role of the paying agent intertwines with other types of agents in the complex process of bringing a new issue to market.
Other Paying Agent Services
Specialized firms such as investment banks, which act as paying agents, may provide related services that go beyond a simple disbursement of funds, including, but not limited to:
- Automate the process of paying dividends and/or interest payments to maximize shareholder convenience
- Structuring and processing of all required documentation
- Provide additional investment management services
- Provide access to a full team of professionals and applicable technology
Paying agencies that are investment banks can also help connect their clients with the shareholders of a target company in the event of a cash distribution of the proceeds of an acquisition or an LBO.
Auxiliary agent roles
In the debt capital markets, a wide range of administrative roles, in addition to that of paying agent, help carry out transactions related to bringing new issues to market.
- Agent bank. This role is required when there is a variable interest rate. The agent bank simply calculates the coupon payments relating to each interest period based on the formula(s) set out in the terms and conditions of the securities.
- Calculation Agent. This role is required when coupon payments are more complicated than floating interest rates. For example, if indexed or derivative-based calculations are needed, a calculation agent at the agent bank performs this task.
- Clerk. The Registrar maintains registers of holders of registered securities. Often this role is played by the same party that performs the roles of depositary or paying agent. Other parties, called transfer agents, can help with this process in other jurisdictions.
- Guardian. If the issue is secured, the underlying assets may include debt securities. This is an especially common scenario in repackages and other structured finance transactions. In this case, a custodian holds the assets in an account on behalf of the issuer.
- Listing agent. If the debt securities will be listed on a stock exchange, the stock exchange may specify that there must be a listing agent. The listing agent acts as a liaison between the issuer and the exchange. They will prepare all the material to be submitted to the exchange, including the prospectus.
- Legal advisers. If the issue involves a syndicate of lenders, the issuer and underwriter – and if applicable, the trustee – will each appoint their own legal advisers. If the issue involves a foreign jurisdiction, foreign attorneys are usually appointed to advise on local laws, selling restrictions and regulations.
A paying agent agreement
There are many formats of paying agent agreements. Banks usually have their own standard agreements, as does the Securities and Exchange Commission (SEC). A paying agent agreement indicates the date of the agreement and the parties involved, as well as the physical addresses, if any, where the principal amount will be kept. These agreements typically cite offer details, such as “XYZ municipal government offers $200,000,000 in floating rate notes, due August 10, 2019.” The agreement could provide that payment of principal and interest on the notes would be guaranteed by a guarantor or trustee. The paying agent agreement also describes the exact time and method (when and how) the paying agent will pay interest on notes or other securities issued.