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).

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.

indenture

noun agreement, agreement to work, apprenticeship agreement, arrangement, commitment, contract, contract to work, contractual obligation, connractual statement, covenant, deed of agreement, instrument, mutual agreement, mutual undertaking, pact, pactum, stipulation, undertaking
See also: bind, bond, compact, contract, liability, obligate, obligation, pact, security, servitude, specialty, stock, undertake

indenture

see APPRENTICE.

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.

References in periodicals archive ?
Being wary of this wealth transfer to stockholders, bondholders seek to include protective covenants in bond indentures to deter stockholders and managers from implementing such an asset substitution.
The supertrustee will have a duty to monitor, actively and independently, the compliance of the borrower with the covenants in the bond indenture. In fulfilling this duty, the supertrustee will not be permitted to rely on the company's own possibly self-serving "compliance certificates" stating, without more, that the company has not breached any covenants.
Two different rationales may explain why a firm includes event risk covenants in the bond indenture. On the one hand, these covenants could offer an effective mechanism to protect bondholders from wealth transfers that may result from debt-financed takeovers and recapitalizations; they would then reduce the agency costs of debt associated mainly with the risk incentive problem between stockholders and bondholders.
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.
We used the categorical variable LR to denote the presence of leverage restrictions in the bond indenture. Restrictions were designated to be strong, weak, or non-existent to correspond with the description in Moody's.
This legislation makes the Repayment Assistance Program (RAP) and the Household Income Assistance Repayment Plans (HIARP) permanent features of the NJCLASS program, building on the initial creation of these programs as part of the past two NJCLASS bond indentures. No state appropriation is used to finance NJCLASS loans, which are funded entirely through private activity revenue bonds issued by the New Jersey Higher Education Student Assistance Authority (HESAA).
After a Federal District Court Judge ruled that Windstream (WIN) had violated bond indentures by engaging in the sale and leaseback transaction with Uniti Group (UNIT), creating an event of default, Morgan Stanley analyst Simon Flannery noted that the consensus view had been that Windstream was likely to prevail in the litigation.
the authority may at its option, issue or place bonds, debt, certificates or instruments under its existing bond indentures or programs such as the housing mortgage finance program bonds, state-supported special obligation bonds or under new programs or indentures (including new standalone indenture or program) as it sees fit.
Still, I can't help keeping my fingers crossed that The Accountant 2 sees Ben Affleck returning to the normal life of a small-town auditor, filing tax returns for a family-owned SME, working on bond indentures and being an all-round safe pair of hands with his clients' finances.
Worse yet, even this triple disaster often did not fit the definition of the seismic event defined by the bond indentures. We need far more--and better--catastrophe bonds.
Section II explores features of railroad bond indentures and the payment system that they created, including the inclusion of gold clauses.