| An Indenture Agreement, also known as an | | | | trigger this right of redemption. Upon redemption, |
| Indenture, is a formal contract between a bond | | | | the principal amount plus interest up to the |
| issuer and a bondholder that describes the bond | | | | redemption date must be paid. |
| and amount at issue, and specifies the legal | | | | Article IV: Covenants. The agreement should list |
| obligations of the bond issuer and the rights of | | | | specific covenants in detail, promises that each |
| the bondholder, such as the time period before | | | | party makes to the other. These covenants could |
| repayment, amount of interest paid, if the bond is | | | | address issues relating to the payment of notes, |
| convertible (and if so, at what price or what | | | | reports, certificates of compliance, dividends, |
| ratio), if the bond is callable, and the amount of | | | | incurrence of indebtedness and issuance of |
| money that is to be repaid. A typical indenture | | | | preferred stock, asset sales, transactions with |
| agreement can be structured to include the | | | | affiliates, business activities, offers to repurchase |
| following articles. Each article should be broken into | | | | the bonds upon change of control, limitations on |
| paragraphs addressing specific issues within the | | | | sale and leaseback transactions, events of loss or |
| broader article. | | | | change of ownership, audits, insurance, and |
| Article I: Definitions and Incorporation by | | | | countless other areas. |
| Reference. This article should lay out the | | | | Article V: Defaults and Remedies. This article |
| definitions of the terms used in the agreement. It | | | | should cover issues relating to events of default, |
| should also list any other agreements that are | | | | acceleration, and waivers of past default. It should |
| incorporated by reference into the indenture. | | | | also address limitations on lawsuits, if any, placed |
| Finally, if necessary it should describe any rules of | | | | on bondholders, the rights of bondholders to |
| construction applicable to the agreement; for | | | | receive payment, and issues relating to collections' |
| instance, this section could clarify that an | | | | suits by the trustee. |
| accounting term not otherwise defined has the | | | | Article VI: Trustee. A trustee is always involved in |
| meaning assigned to it in accordance with General | | | | the issuance of bonds to bondholders. This article |
| Accepted Accounting Principles, a.k.a. GAAP. | | | | should talk about the role of the trustee, including |
| Article II: The Notes. This article should describe in | | | | his or her duties, rights, and obligations. When is |
| detail the rules governing the issuance of the bond | | | | the trustee obligated to give a report to |
| notes. What bond notes are at issue? What type | | | | bondholders? When and how is he or she liable for |
| are they? How are they registered with the SEC? | | | | the failure of the bond issuer? If necessary, when |
| What agent will be utilized to effectuate the | | | | and how should the trustee be replaced? Who is |
| official transfer? When is the date the bonds | | | | eligible to be the trustee? These issues should be |
| mature, and under what circumstances can they | | | | addressed in this separate article dedicated to the |
| be called? Can they be replaced with other notes? | | | | trustee. |
| What is the rate of interest? Under what | | | | These are the most important provisions that |
| circumstances can they be cancelled? These | | | | must be included in an indenture agreement. Note |
| questions should be addressed in Article II. | | | | that an indenture is usually a long, complex |
| Article III: Redemption and Offers to Purchase | | | | agreement laying out in great detail the rights and |
| Notes. Redemption is the repayment of a debt | | | | duties of bond issuers and bond holders. |
| security or preferred stock issue, at or before | | | | Miscellaneous provisions addressing communication |
| maturity, at par or at a premium price. Most | | | | by holders of notes to other holders, the liability |
| indenture agreement will provide for an | | | | of directors and officers of the issuing company, |
| opportunity for the bond issuers to redeem up to | | | | governing law, severability, and other boilerplate |
| a certain percentage of the aggregate principal | | | | contract provisions must also be included to round |
| amount of the bonds at any time prior to the | | | | out a complete and enforceable indenture. |
| maturity date. Sometimes a certain event must | | | | |