Trust Indenture

A trust indenture is a legally binding agreement between a bond issuer and an independent trustee that sets out the rights and obligations of the issuer, the trustee, and the bondholders. Its purpose is to protect investors by documenting the bond’s terms and the procedures that apply if the issuer defaults.

Key takeaways

• A trust indenture is a formal contract between a bond issuer and a trustee to protect bondholders’ interests.
• It specifies bond characteristics (maturity, face value, coupon, payment schedule), call features, covenants, and default procedures.
• Many of today’s trust indenture rules stem from the Trust Indenture Act of 1939.
• Corporations issuing bonds with aggregate principal of $5 million or more must generally file an indenture with the SEC.

What a trust indenture covers

A typical trust indenture includes:
* Identification of the trustee (usually a bank or trust company) and the trustee’s duties.
Bond characteristics: maturity date, face (principal) value, coupon (interest) rate, payment schedule, and stated purpose of the issue.
Call provisions: whether the issuer can redeem the bonds early, the call protection period, first and subsequent call dates, and any call premium.
Covenants (protective or restrictive): rules that limit issuer behavior to protect bondholders (for example, restrictions on additional borrowing, asset sales, or dividend policies).
Subordination clauses: whether and how future debt ranks behind existing debt.
* Default and remedies: the circumstances that constitute default and the collective-action procedures for creditors to enforce claims or recoveries in an orderly manner.

How it works

When a bond is issued, the issuer hires a trustee to act on behalf of bondholders. The trustee monitors compliance with the indenture, enforces bondholder rights, and manages creditor actions if problems arise (for example, coordinating claim filing or pursuing legal remedies). The indenture defines timelines and processes for resolving conflicts, replacing trustees, and handling defaults.

Special provisions to watch

• Call protection — a period during which bonds cannot be redeemed by the issuer.
• Call premium — extra compensation the issuer pays if it redeems bonds early.
• Subordination — limits on issuing new debt that would rank senior to current bondholders.
• Covenants — affirmative or negative promises by the issuer (e.g., maintain insurance, limit debt ratios).

Which bonds use an indenture

• Most corporate bond offerings with aggregate principal of $5 million or more must include a trust indenture and file it with the SEC.
• Government and municipal bonds often use alternative documents (such as bond resolutions) to disclose issuer and bondholder rights; they are not always governed by a trust indenture filed with the SEC.
• Smaller corporate offerings, municipal bonds, and sovereign/government issues may be exempt from the SEC filing requirement but can still adopt an indenture voluntarily to reassure investors.

Why it matters to investors

A clear, well-drafted trust indenture improves transparency and provides mechanisms to:
* Limit issuer actions that increase bondholder risk.
Define remedies and the order of recovery in default scenarios.
Specify who represents bondholders and how claims will be pursued.

Quick investor checklist

Before buying a bond, review the indenture (or comparable documentation) for:
* Trustee identity and responsibilities.
Maturity, coupon, payment schedule, and purpose of proceeds.
Call features and call protection length.
Key covenants and any debt limits or subordination language.
Default definitions and creditor remedies.

Understanding the trust indenture helps investors assess credit risk, liquidity risk from early calls, and the strength of protections available if the issuer encounters financial distress.