Indenture: Definition, Types, Key Clauses, and Why It Matters

What is an indenture?

An indenture is a formal legal contract that sets the terms, conditions, and obligations of a financial or real‑estate arrangement. Common contexts include:

• Bonds and other debt securities (credit indentures or debentures)
• Real‑estate deeds and property agreements
• Bankruptcy filings where indentures document secured claims

The term originally referred to old written agreements with indented edges; today it functions as the definitive reference document that governs rights and duties of issuers, creditors, and other parties.

Key takeaways

• Indentures define the mechanics and protections of debt and property contracts.
• In bond markets they specify maturity, interest, covenants, call/convertible features, and collateral.
• Trustees may be appointed to enforce the indenture and act on behalf of bondholders.
• In bankruptcy, an indenture documents secured claims and lien priorities.

Types and common uses

Credit (bond) indentures
– Also called debentures when unsecured.
– Describe everything about a bond issue: principal, maturity, interest schedule, methods of calculation, callability, convertibility, and applicable covenants.
– May include provisions for collateral and priority of claims.

Real‑estate indentures
– Function as deeds or contracts assigning ongoing obligations (e.g., maintenance, payment arrangements, easements).
– Can establish mortgages or liens that secure lenders’ claims against property.

Bankruptcy usage
– Indentures often serve as evidence of a creditor’s claim and describe collateral that secures that claim.
– They help establish lien priority and the nature of the creditor’s remedy in insolvency.

Common indenture clauses and terms

• Maturity date: when principal is due.
• Interest terms: rate, payment dates, and calculation method.
• Covenants: affirmative and negative clauses that limit or require issuer actions (e.g., maintaining financial ratios).
• Financial ratios and formulas: tests used to determine covenant compliance.
• Collateral and liens: assets backing the obligation and how they’re assigned.
• Closed‑end vs. open‑end provisions: closed‑end clauses dedicate specific collateral to a single issue; open‑end clauses may allow additional secured obligations under specified conditions.
• Subordination: clauses that rank one creditor’s claim below others.
• Callability: issuer’s right to redeem bonds early.
• Convertibility: whether bonds can convert into equity.
• Trustee or trust indenture: when a trustee is appointed, the trust indenture details the trustee’s duties and powers.

Role of the indenture trustee

When appointed, a trustee acts on behalf of bondholders to:

• Monitor issuer compliance with indenture terms
• Collect and distribute interest and principal payments
• Communicate with investors
• Enforce remedies if covenants are breached (including pursuing collateral)

The trustee provides centralized oversight and helps coordinate actions among multiple holders.

How indentures matter to investors and issuers

• For investors: the indenture is the authoritative document that determines rights, protections, remedies, and recovery priorities in distress or bankruptcy.
• For issuers: it sets the contractual limits on financing flexibility and operations via covenants and collateral requirements.
• In ordinary times indentures may be background documents; during covenant tests, credit events, or restructurings, they become the primary reference for resolving disputes.

Conclusion

An indenture is a foundational legal contract for debt and property transactions. Understanding its key clauses—maturity, interest, covenants, collateral, and trustee rights—helps investors assess risk, enforce claims, and evaluate how a security will behave under stress. Always review the specific indenture for details that materially affect claims, priority, and protections.