What Is an Indenture?
Indenture refers to a legal and binding agreement, contract, or document between two or more parties. Traditionally, these documents featured indented sides or perforated edges.
Historically, indenture has also referred to a contract binding one person to work for another for a set period of time, particularly European immigrants. In modern-day finance, the term most commonly appears in bond agreements, real estate deals, and some aspects of bankruptcies.
Key Takeaways
- An indenture serves as a legal and binding contract often associated with bond agreements, real estate transactions, or bankruptcy proceedings.
- An indenture provides detailed information on terms, clauses, and covenants within the agreement.
- There can be various types of indentures, each with its own unique clauses and conditions.
Indenture Explained
Indenture is a term that originated in England. In the U.S., several types of indentures exist, all typically related to debt agreements, real estate, or bankruptcy.
Types of Indentures
Below are some common types of indentures and clauses that may be associated with indenture contracts.
Real Estate Indenture
In real estate, an indenture is a deed entailing that two parties agree to continuing obligations. For example, one party may agree to maintain a property while the other may commit to making payments on it.
Bankruptcy Indenture
In bankruptcy law, an indenture may serve as proof of a claim on property. Generally, indentures provide details on collateralized property, establishing the claim a lender has against a debtor, often secured with a lien on the debtor’s property.
Credit Indentures
A credit indenture is an underlying contract detailing all provisions and clauses associated with a credit offering. In unsecured, uncollateralized bond offerings, these indentures are also referred to as debentures.
Typically, a credit indenture caters to bond issuers and bondholders. It specifies essential features of a bond, such as its maturity date, the timing of interest payments, method of interest calculation, callability, and convertible features, if applicable. A bond indenture also contains all terms and conditions relevant to the bond issue, including financial covenants that govern the issuer and the formulae for calculating compliance with these covenants, usually based on corporate financial ratios.
The indenture becomes the reference document during conflicts between issuers and bondholders, ensuring there’s no ambiguity in calculating the financial ratios that determine covenants adherence.
In the fixed-income market, an indenture is rarely referred to under normal conditions but becomes crucial during events like potential covenant violations by the issuer.
Other Common Credit Indenture Terms
In a credit offering, a closed-end indenture clause details any collateral backing the offering. Closed-end indentures include collateral and provisions ensuring the collateral is assigned to a specific offering exclusively.
Other terms associated with credit indenture clauses can include open-end indenture, subordinated, callable, convertible, and non-convertible.
In some cases, an issuer may hire a trustee resulting in a trust indenture. A trust indenture resembles a bond indenture but also outlines the trustee’s duties in ensuring the bond’s terms are followed.
An indenture trustee’s responsibilities include fiduciary duties concerning the credit issuance, such as monitoring interest payments, redemptions, and communicating with investors. They may lead trust departments at institutions, essentially overseeing and administering all terms, clauses, and covenants of an indenture issued by a company or government agency.
Related Terms: bond indenture, contract agreement, debentures, liens, credit offering, trust indenture, closed-end indentures, fiduciary duties.
References
- Cornell University, Legal Information Institute. “Indenture”.
