indenture

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Indenture

An agreement declaring the benefits and obligations of two or more parties, often applicable in the context of Bankruptcy and bond trading.

The term indenture primarily describes secured contracts and has several applications in U.S. law. At its simplest, an indenture is an agreement that declares benefits and obligations between two or more parties. In bankruptcy law, for example, it is a mortgage or deed of trust that constitutes a claim against a debtor. The most common usage of indenture appears in the bond market. Before a bond is issued, the issuer executes a legally binding indenture governing all of the bond's terms. Finally, the concept of indenture has an ignominious place in the history of U.S. labor. Indentured servants of the seventeenth and eighteenth centuries were commonly European workers who contracted to provide labor for a number of years and in return received passage to the American colonies as well as room and board.

As an investment product that is used to raise capital, a bond is simply a written document by which a government, corporation, or individual promises to pay a definite sum of money on a certain date. The issuer of a bond, in cooperation with an underwriter (i.e., a financial organization that sells the bond to the public), prepares in advance an indenture outlining the terms of the bond. The issuer and the under-writer negotiate provisions such as the interest rate, the maturity date, and any restrictions on the issuer's actions. The last detail is especially important to corporate bonds because corporations Accrue liability upon becoming bond issuers and therefore seek to have the fewest possible restrictions placed on their business behavior by the terms of the indenture. As a consequence, potential buyers of corporate bonds should know what the indenture specifies before buying them.

Federal law governs these indentures. For 50 years, the Trust Indenture Act of 1939 (TIA) (15 U.S.C.A. § 77aaa) was the relevant law. Significant changes in financial markets prompted Congress to amend the TIA through the Securities Act Amendments of 1990 (Pub. L. No. 101-550, 1990; 104 Stat. 2713), which included the Trust Indenture Reform Act (Pub. L. No. 101-550, 104 Stat. 2713). The reforms simplified the writing of indentures, recognized the increasing internationalization of corporations by creating opportunities for foreign institutions to serve as trustees, and revised standards for conflicts of interest. The reforms also broadened the authority of the Securities and Exchange Commission.

In early American history, indenture was a form of labor contract. Beginning during the colonial period, employers in the largely agricultural economy faced a labor shortage. They addressed it in two ways: by buying slaves and by hiring indentured servants. The former were Africans who were brought to the colonies against their will to serve for life; the latter were generally Europeans from England and Germany who had entered multiyear employment contracts. From the late sixteenth century to the late eighteenth century, approximately half of the 350,000 European immigrants to the colonies were indentured servants. During the seventeenth century, these servants outnumbered slaves.

An indentured servant agreed to a four-to seven-year contract, and in return received passage from Europe and guarantees of work, food, and lodging. Colonial courts enforced the contracts of indentured servants, which were often harsh. Employers were seen as masters, and the servants had not only to work for them but also to obey their orders in all matters. For some, indentured servitude was not a Voluntary Act. Impoverished women and children were pressed into servitude, as were convicts. Nevertheless, this servitude was not equivalent to Slavery. Slaves remained slaves for life, whereas indentured servants were released at the end of their contracts. Moreover, as parties to a contract, indentured servants had rights that slaves never enjoyed. The practice of indentured servitude persisted into the early nineteenth century.

Further readings

Ballam, Deborah A. 1996. "Exploding the Original Myth Regarding Employment-At-Will: The True Origins of the Doctrine." Berkeley Journal of Employment and Labor Law 17.

——. 1995. "The Traditional View on the Origins of the Employment-At-Will Doctrine: Myth or Reality?" American Business Law Journal 33 (fall).

Riger, Martin. 1991."The Trust Indenture as Bargained Contract: The Persistence of Myth." Journal of Corporation Law 16 (winter).

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.

indenture

n. a type of real property deed in which two parties agree to continuing mutual obligations. One party may agree to maintain the property, while the other agrees to make periodic payments. 2) a contract binding one person to work for another. 3) v. to bind a person to work for another.

Copyright © 1981-2005 by Gerald N. Hill and Kathleen T. Hill. All Right reserved.

indenture

see APPRENTICE.
Collins Dictionary of Law © W.J. Stewart, 2006

INDENTURE, conveyancing. An instrument of writing containing a conveyance or contract between two or more persons, usually indented or cut unevenly, or in and out, on the top or, side.
     2. Formerly it was common to make two instruments exactly alike, and it was then usual to write both on the same parchment, with some words or letters written between them, through which the parchment was cut, either in a straight or indented line, in such a manner as to leave one-half of the word on one part, and half on the other. The instrument usually commences with these words, "This indenture," which were not formerly sufficient, unless the parchment or paper was actually indented to make an indenture 5 Co. 20; but now, if the form of indenting the parchment be wanting, it may be supplied by being done in court, this being mere form. Besides, it would be exceedingly difficult with even the most perfect instruments, to out parchment or paper without indenting it. Vide Bac. Ab. Leases, &c. E 2; Com. Dig. Fait, C, and note d; Litt. sec. 370; Co. Litt. 143 b, 229 a; Cruise, Dig t. 32, c. 1, s. 24; 2 Bl. Com. 294; 1 Sess. Cas. 222.

A Law Dictionary, Adapted to the Constitution and Laws of the United States. By John Bouvier. Published 1856.
References in periodicals archive ?
corporate bond indentures at the time specified important aspects of bond issues, including (1) the form of bond coupon and principal payments, which was commonly specified through gold clauses, (2) the location of these payments, which facilitated payment in specie even when bank deposit convertibility was suspended, (3) the bearer or registered form of the security, where the bearer form could be readily transferred among exchanges.
(7) Thies (2005) provides a comprehensive review of the role that gold clauses played in railroad bond indentures. Gold clauses became popular in times of monetary uncertainty, as with the silver risk created by the bimetallism movement of the 1880-90s.
Being wary of this possible loss in bond values, bondholders often require that a protective covenant be included in the bond indenture explicitly restricting the sale and lease-back transaction on particular assets of the borrowing firm.
These include minimum financial ratio covenants--for example, current ratio and interest coverage ratio covenants, and minimum net worth covenants.(66) Unlike the "discretion-limiting" covenants found in both bond indentures and loan agreements (such as restricted payment covenants), state-of-the-firm covenants concern events (such as business losses) that are often not subject to direct managerial control.(67) As a result, violations of state-of-the-firm covenants are much more common than violations of discretion-limiting covenants.(68)
Two different rationales may explain why a firm would include ERCs in the bond indenture. On the one hand, ERCs could be effective in protecting bondholders from wealth transfers that may result from debt-financed takeovers and recapitalizations, lowering agency costs of debt.
It should be emphasized that any bank or investment banking firm that is evaluating whether to provide financing to a hostile acquirer always reviews a target company's preferred stock provisions, bond indentures, and loan agreements to determine if there are any serious impediments to the acquisition.
Second, covenants in bond indentures appear to ebb and flow with cycles in capital markets.
Cox, "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance (May 1976), pp.
Many bond indentures include optional sinking fund payments, called "acceleration" features, which allow the issuer to call more than the required sinking fund payments at par.
BNRR's experience with the tight indenture provisions of its Northern Pacific bonds is an interesting example of the agency-cost tradeoffs in bond indentures. Although tight covenants reduce bondholder uncertainty about future actions of managers -- and therefore increase proceeds from the sale of debt -- the cost of the indenture restraints is a loss of managerial discretion.
Panel E classifies the bonds into three groups according to the strength of any leverage restrictions in the bond indentures as indicated in Moody's Industrial Manual from the year preceding the buyout.
Provisions of Valeant's credit agreement and bond indentures could result in debt acceleration following specified cure periods, but only if bank lenders or bondholders serve required notices.