What is indenture?
An indenture is a legally binding deal, contract, or piece of paper between two or more people. In the past, these papers had sides that were cut or had holes in them.
In the past, “indenture” also meant a contract that forced someone, usually European immigrants, to work for someone else for a set amount of time. The word “denture” is often used in bond agreements, real estate deals, and some parts of bankruptcy cases today.
How the Indenture Works
The word “indenture” comes from English. There are different kinds of indentures in the U.S., but they all have to do with debt deals, real estate, or bankruptcy.
Types of false teeth
Some of the most common kinds of indentures and clauses that can be found in them are shown below.
Indenture for Real Estate
In real estate, an indenture is a document that says two people agree to keep making payments. One side might agree to take care of a property, and the other might agree to pay for it.
Indenture for Bankruptcy
It can be used as proof of a claim on property under bankruptcy law. Indentures usually list the collateralized property on which the lender has a claim against the debtor, typically backed up by a lien on the debtor’s property.
Indentures for credit
A credit indenture contract deal lays out all the terms and conditions of a credit offer. These papers can also be called debentures when they are used to issue uninsured, non-collateralized bonds.
Sometimes, a credit indenture is helpful for bond issuers and investors. It lists the important things about a bond, like when it matures, when interest is paid, how interest is calculated, whether the bond can be called, and, if appropriate, whether it can be converted. A bond type also lists all the rules and restrictions for the bond issue.
This also has essential information like the issuer’s financial covenants and the formulas used to check if the issuer follows the covenants (usually ratios based on company financials). If there is a disagreement between the issuer and the bondholder, the indenture is the paper used to settle the disagreement.
When things are going well, an indenture is rarely discussed in the fixed-income market. Sometimes, it is more critical than other documents, like when the issuer might break a loan covenant.
Then, this is carefully reviewed to ensure there are no mistakes in figuring out the financial measures that show if the issuer is following the covenants.
Other Terms Often Used in Credit Indentures
A closed-end indenture phrase can be used in a credit offering to describe any collateral that backs up the offering. Closed-end indentures have rules that ensure the collateral can only be assigned to one offering.
Other words may describe credit indenture conditions, such as subordinated, callable, convertible, and non-convertible.
The bond owner may hire a trustee with some credit in this domain. A trust indenture is also needed when there is a trustee.
It is like a bond indenture, but it also spells out what the trustee needs to do to keep an eye on the bond issue terms.
An indentured trustee is responsible for the task of giving out credit. These people monitor interest payments, redemptions, and contacts with investors. These people may also be in charge of trust offices at businesses. Their main job is to ensure that all the terms, clauses, and covenants of an indenture issued by a business or government body are followed.
Conclusion
- An indenture is a legally binding agreement often used in bond, real estate, or bankruptcy deals.
- There is much information about the rules, clauses, and covenants.
- Dentures come in a few different styles, and their terms differ.
