An indenture is the written contract a debt security is issued under. It fixes the terms of that debt, meaning the principal, the interest rate and payment dates, the maturity, any redemption or sinking fund provisions, the collateral where the debt is secured, and what counts as an event of default. It also appoints a trustee, who holds those terms and enforces them on behalf of every holder at once. That trustee is what separates one borrowing divided among many investors from a single agreement with one lender.
Federal law defines the word broadly, and not by the label on the cover page. The term indenture means any mortgage, deed of trust, trust or other indenture, or similar instrument or agreement, including any supplement or amendment to any of the foregoing, under which securities are outstanding or are to be issued, whether or not any property, real or personal, is, or is to be, pledged, mortgaged, assigned, or conveyed thereunder (15 U.S.C. 77ccc(7)). Bond counsel describe the same document as a contract between an issuer and a trustee, normally a commercial bank with trust powers, under which the issuer issues bonds and specifies their maturities, interest rates, redemption provisions, form, exchange provisions, security and other terms, with the trustee agreeing to act on behalf of the holders of the bonds and to represent their interests (National Association of Bond Lawyers, Bond Basics).
When an Indenture Has to Be Qualified
An indenture is qualified when registration becomes effective as to the security issued under it, or when a separate application to qualify the indenture becomes effective (15 U.S.C. 77iii(a)), and for registered debt qualification works through a refusal power. The Commission shall issue an order prior to the effective date of registration refusing to permit a registration statement to become effective if it finds that the security to which the registration statement relates has not been or is not to be issued under an indenture, or that any person designated as trustee under that indenture is not eligible to act as such (15 U.S.C. 77eee(b)(1)). Where the Act reaches the offering, a registered debt issue therefore arrives with an indenture and an eligible trustee or it does not go effective. On securities eligible to be issued on a delayed basis, trustee eligibility can instead be settled by a separate application filed for that purpose (15 U.S.C. 77eee(b)(2)).
Unregistered debt inside the statute’s reach is prohibited outright instead. Where a security is not registered under the Securities Act of 1933 and this part of the Act still applies to it, selling that security through the mails or interstate commerce is unlawful unless it has been or is to be issued under an indenture and an application for qualification is effective as to that indenture (15 U.S.C. 77fff(a)).
The reach is narrower than that sounds, and the first limit is the instrument. The provisions do not apply to any security other than a note, bond, debenture or evidence of indebtedness, whether or not secured, a certificate of interest or participation in one of those, or a temporary certificate for or guarantee of one (15 U.S.C. 77ddd(a)(1)). Stock is outside that list, so an equity issue sits outside the qualification question entirely.
The second limit is size. Securities issued under an indenture that limits the aggregate principal amount outstanding at any time to $10,000,000, or a lesser amount the Commission sets, are exempt, and that exemption may not be applied within a period of thirty-six consecutive months to more than $10,000,000 aggregate principal amount of securities of the same issuer (15 U.S.C. 77ddd(a)(9)).
The third limit is the transaction. The qualification sections do not apply to transactions exempted from section 5 of the Securities Act of 1933 by section 4 of that Act (15 U.S.C. 77ddd(b)), which is the ground a private placement stands on. A privately placed note issue may still be documented under an indenture by agreement, and nothing about that makes it a qualified one.
Where those exemptions do not apply, the registration statement carries a map of what the indenture contains. It has to include an analysis of the indenture’s provisions on what constitutes a default and the withholding of notice of a default from holders, the authentication and delivery of the indenture securities and the application of their proceeds, the release or the release and substitution of property subject to the lien, the satisfaction and discharge of the indenture, and the evidence the obligor must furnish the trustee as to compliance with the indenture’s conditions and covenants (15 U.S.C. 77eee(a)(2)). Those headings work as a reading order for any indenture, qualified or not.
What the Trustee Must Be
At least one trustee has to be an institution, not an individual. There have to be one or more trustees at all times under every indenture qualified or to be qualified, and at least one of them, which the Act calls the institutional trustee, must be a corporation organized and doing business under the laws of the United States, of a State or Territory or of the District of Columbia, or a corporation or other person the Commission permits to act, which is authorized under those laws to exercise corporate trust powers and is subject to supervision or examination by Federal, State, Territorial or District of Columbia authority (15 U.S.C. 77jjj(a)(1)).
How large it has to be is set in the indenture, against a statutory floor. That institutional trustee shall have at all times a combined capital and surplus of a specified minimum amount, which shall not be less than $150,000 (15 U.S.C. 77jjj(a)(2)).
The borrower cannot be its own trustee. Obligor is the statute’s word for every person, including a guarantor, who is liable on the security (15 U.S.C. 77ccc(12)), and no obligor upon the indenture securities, and no person directly or indirectly controlling, controlled by or under common control with that obligor, may serve as trustee (15 U.S.C. 77jjj(a)(5)).
Conflicts are policed on a clock, and only once the debt is already in trouble. A trustee is deemed to have a conflicting interest only if the indenture securities are in default as default is defined in the indenture, and the listed conflicts include serving as trustee under another indenture of the same obligor and having the trustee or any of its directors or executive officers act as an underwriter for an obligor. Once such a conflict arises, the trustee has 90 days after ascertaining it, and if the default the conflict relates to has not been cured, duly waived or otherwise eliminated by the end of that period, the trustee has to eliminate the conflict or resign, and the obligor then takes prompt steps to have a successor appointed (15 U.S.C. 77jjj(b)).
What the trustee owes holders changes at the same moment. Before default the Act deems the indenture to say the trustee is not liable except for the performance of the duties specifically set out in it, unless the indenture expressly excludes that provision, and in case of default the trustee has to exercise the rights and powers vested in it by the indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs (15 U.S.C. 77ooo(a) and (c)).
That is what makes the instrument collective rather than a stack of separate promises. On a default in payment of principal when it becomes due, or in payment of interest continuing for the period the indenture prescribes, the trustee is authorized to recover judgment, in its own name and as trustee of an express trust, against the obligor for the whole amount of principal and interest remaining unpaid (15 U.S.C. 77qqq(a)(1)). One suit by the trustee recovers the whole unpaid amount for the holders as a group.
The trustee’s power does not take away the holder’s. Notwithstanding any other provision of the indenture to be qualified, the right of any holder to receive payment of the principal of and interest on that security, on or after the due dates expressed in it, or to institute suit for the enforcement of any such payment on or after those dates, may not be impaired or affected without that holder’s consent, subject to three narrow exceptions (15 U.S.C. 77ppp(b)).
Where an Indenture Lands in a Firm’s Work
On a public client the indenture is a filed exhibit, so the preparer can read the document instead of a summary of it. Instruments defining the rights of security holders, including indentures, are filed as an exhibit, and that reaches all instruments defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries, and of any unconsolidated subsidiary whose financial statements have to be filed (17 CFR 229.601(b)(4)(ii)).
A qualified indenture arrives with its own index. Where the securities being registered are or will be issued under an indenture to be qualified under the Trust Indenture Act, the filed copy has to include or be accompanied by a reasonably itemized and informative table of contents and a cross-reference sheet showing the location in the indenture of the provisions inserted pursuant to sections 310 through 318(a) inclusive of the Trust Indenture Act of 1939 (17 CFR 229.601(b)(4)(iv)). That sheet points straight at the trustee, default and compliance provisions.
Not every instrument is there to be found. An instrument covering long-term debt that is not being registered need not be filed if the total amount of securities authorized under it does not exceed 10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis, provided an agreement to furnish a copy to the Commission on request is filed instead (17 CFR 229.601(b)(4)(iii)(A)). A smaller issue can be absent from the exhibit list and still govern a balance on the sheet.
What a preparer takes out of the document splits three ways. The maturity schedule and the acceleration and redemption provisions decide how much of the balance is current at the reporting date, the question worked through in long-term liabilities and, on the promise side, in covenants. The face amount, the stated rate and the payment dates are the inputs to the effective interest calculation set out in bonds payable, with par itself covered in face amount of a bond. The terms that get described in the notes are read off the indenture rather than reconstructed from the trial balance.
What an Indenture Is Not
It is not a bond. The indenture is the contract, and the bond is the security issued under it, which the statute calls an indenture security, meaning any security issued or issuable under the indenture to be qualified (15 U.S.C. 77ccc(11)). The issuer’s liability for those securities is bonds payable.
It is not a covenant. A covenant is one promise carried inside the contract, and the affirmative, negative and financial types, the way each gets tested, and the compliance certificate the obligor owes the trustee are all in covenants.
It is not a note payable to a single bank. That instrument runs to one lender under one signed promise, and what the note itself fixes is in bank notes payable.
It is not the act of putting the securities out either. The contract authorizes them; handing them to holders for value is issuance.
Common Questions
It is the contract a debt security is issued under, naming the issuer, the trustee and the terms, and it is the document a holder’s rights are read out of. The trustee agrees to act on behalf of the holders of the bonds and to represent their interests, so the terms are negotiated and administered through one representative rather than by each holder separately (National Association of Bond Lawyers, Bond Basics).
The word reached finance from English land practice. An indenture is a particular formal contract or deed made between two or more parties, a form that dates to medieval England and was initially used to convey land and for service contracts (Cornell Law School, Legal Information Institute, Wex). A bond indenture is the same kind of instrument put to a different job.
Bond counsel list the same document as an indenture or a trust indenture or agreement (National Association of Bond Lawyers, Bond Basics), and the statutory definition reaches a mortgage or a deed of trust under the one term (15 U.S.C. 77ccc(7)).
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own debt schedules and note disclosures through a trial task before anything client facing depends on it.
