Trustees need to understand and monitor value of contingent assets

Trustees should ensure they understand the nature of any security or contingent asset that they are being given, Spence and Partners director and head of its trustee advisory practice Marian Elliott said.

While contingent assets can be a good solution to help with scheme funding, Elliott warns that they are often more complex than more traditional asset classes and are also more difficult to monitor over time.

“That becomes even more difficult when you are talking about patents, trademarks and intellectual property, because there are very few people who are adequately able to value this. Also intellectual property can change dramatically as the fortunes of the company change. So for example a brand in a distressed situation may be worth something very different than it would be while the company is doing well,” she explained.

Trustees therefore do not only need to value the asset on the outset, but also review how the value is changing over time and how to monitor any change in the value. So getting really specialist technical advice on that is very important, Elliott said.

However, up to now most of these deals, particularly those that are involving trademarks, patents and intellectual property, have been carried out where the trustees have got very good and very strong technical advice.

“As that comes down to the smaller schemes where there is a lower budget to get professional advice, there is a danger trustees could enter into something that they don’t understand. So it is important that they, if they’re looking at the possibility of intellectual property-based assets, that they really put a budget around getting advice for the trustees before they enter into that sort of discussion,” Elliott added.

“When reviewing banking covenants, banks may well start to think about trying to extend any charge that they’ve got to cover intellectual property or brands as well, so it’s quite important that trustees think about whether this is something that they want to talk to the company about in advance of perhaps the bank having that conversation.”

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