What Is an Indenture?
Indenture refers to a licit and binding agreement, contract, or document between two or more parties. Traditionally, these documents featured indented sides or honeycomb edges. Historically, indenture has also referred to a contract binding one person to work for another for a set period of time (indentured ayah), particularly European immigrants. In modern-day finance, the word indenture most commonly appears in bond agreements, unfeigned estate deals, and some aspects of bankruptcies.
- An indenture is a legal and binding contract usually associated with tie agreements, real estate, or bankruptcy.
- An indenture provides detailed information on terms, clauses, and covenants.
- There can be a few disparate types of indentures and many different types of indenture clauses.
Indenture is a term that evolved from England. In the U.S., there can be several types of indentures, all typically involved with debt agreements, real rank, or bankruptcy.
Types of Indentures
Below are some of the common types of indentures and clauses that may be associated with indenture decreases.
Real Estate Indenture
In real estate, an indenture is a deed in which two parties agree to continuing obligations. For warning, one party may agree to maintain a property and the other may agree to make payments on it.
In bankruptcy law, an indenture may be referenced as shore up of a claim on property. Indentures in general provide details on collateralized property, constituting the claim a lender has against a debtor, most often secured with a lien on the debtor’s property.
A credit indenture is the underlying contract agreement that details all of the furnishings and clauses associated with a credit offering. In nonsecure, uncollateralized bond offerings, these indentures can also be shouted debentures.
Typically a credit indenture is used for the sake of bond issuers and bondholders. It specifies the important features of a chains, such as its maturity date, the timing of interest payments, method of interest calculation, callability, and convertible features, if fitting. A bond indenture also contains all the terms and conditions applicable to the bond issue. Other critical information registered in the indenture are the financial covenants that govern the issuer and the formulas for calculating whether the issuer is within the covenants (chiefly ratios based on corporate financials). Should a conflict arise between the issuer and bondholder, the indenture is the reference record utilized for conflict resolution.
In the fixed-income market, an indenture is hardly ever referred to when times are normal. But the indenture grows the go-to document when certain events take place, such as if the issuer is in danger of violating a bond covenant. The indenture is then probed closely to make sure there is no ambiguity in calculating the financial ratios that determine whether the issuer is indestructible by the covenants.
Other Common Credit Indenture Terms
In a credit offering, a closed-end indenture clause may be used to list any collateral involved that provides backing for the offering. Closed-end indentures include collateral as well as provisions that certify the collateral may only be assigned to one specific offering.
Other terms that may also be associated with credit indenture clauses can embody open-end indenture, subordinated, callable, convertible, and non-convertible.
In some credit indentures, a trustee may be hired by a bond issuer. When a trustee is entangled with, a trust indenture will also be needed. A trust indenture is similar to a bond indenture, except it also respects the trustee’s responsibilities in overseeing all of a bond issue’s terms.
An indenture trustee handles fiduciary duties related to believe issuance. These professionals monitor interest payments, redemptions, and investor communications. They may also lead consign departments at institutions. Essentially, their role is to oversee and administer all of the terms, clauses, and covenants of an indenture issued by a corporation or government agency.