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Key Provisions of an Indenture Agreement

Jul 30, 2008
An Indenture Agreement, also known as an Indenture, is a formal contract between a bond issuer and a bondholder that describes the bond and amount at issue, and specifies the legal obligations of the bond issuer and the rights of the bondholder, such as the time period before repayment, amount of interest paid, if the bond is convertible (and if so, at what price or what ratio), if the bond is callable, and the amount of money that is to be repaid. A typical indenture agreement can be structured to include the following articles. Each article should be broken into paragraphs addressing specific issues within the broader article.

Article I: Definitions and Incorporation by Reference. This article should lay out the definitions of the terms used in the agreement. It should also list any other agreements that are incorporated by reference into the indenture. Finally, if necessary it should describe any rules of construction applicable to the agreement; for instance, this section could clarify that an accounting term not otherwise defined has the meaning assigned to it in accordance with General Accepted Accounting Principles, a.k.a. GAAP.

Article II: The Notes. This article should describe in detail the rules governing the issuance of the bond notes. What bond notes are at issue? What type are they? How are they registered with the SEC? What agent will be utilized to effectuate the official transfer? When is the date the bonds mature, and under what circumstances can they be called? Can they be replaced with other notes? What is the rate of interest? Under what circumstances can they be cancelled? These questions should be addressed in Article II.

Article III: Redemption and Offers to Purchase Notes. Redemption is the repayment of a debt security or preferred stock issue, at or before maturity, at par or at a premium price. Most indenture agreement will provide for an opportunity for the bond issuers to redeem up to a certain percentage of the aggregate principal amount of the bonds at any time prior to the maturity date. Sometimes a certain event must trigger this right of redemption. Upon redemption, the principal amount plus interest up to the redemption date must be paid.

Article IV: Covenants. The agreement should list specific covenants in detail, promises that each party makes to the other. These covenants could address issues relating to the payment of notes, reports, certificates of compliance, dividends, incurrence of indebtedness and issuance of preferred stock, asset sales, transactions with affiliates, business activities, offers to repurchase the bonds upon change of control, limitations on sale and leaseback transactions, events of loss or change of ownership, audits, insurance, and countless other areas.

Article V: Defaults and Remedies. This article should cover issues relating to events of default, acceleration, and waivers of past default. It should also address limitations on lawsuits, if any, placed on bondholders, the rights of bondholders to receive payment, and issues relating to collections' suits by the trustee.

Article VI: Trustee. A trustee is always involved in the issuance of bonds to bondholders. This article should talk about the role of the trustee, including his or her duties, rights, and obligations. When is the trustee obligated to give a report to bondholders? When and how is he or she liable for the failure of the bond issuer? If necessary, when and how should the trustee be replaced? Who is eligible to be the trustee? These issues should be addressed in this separate article dedicated to the trustee.

These are the most important provisions that must be included in an indenture agreement. Note that an indenture is usually a long, complex agreement laying out in great detail the rights and duties of bond issuers and bond holders. Miscellaneous provisions addressing communication by holders of notes to other holders, the liability of directors and officers of the issuing company, governing law, severability, and other boilerplate contract provisions must also be included to round out a complete and enforceable indenture.
About the Author
Mark Warner is a Legal Research Analyst for RealDealDocs.com. RealDealDocs gives you insider access to millions of legal documents drafted by the top law firms in the US. Search over 10 million Documents, Clauses, and Legal Agreements for Free at http://www.RealDealDocs.com
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