An indenture is a legal contract that reflects or covers a debt or purchase obligation. It is a legally binding agreement or contract between two or more parties. The origin of the term refers to the status of indentured servants, a contract that binds a person to work for another for a given period of time. In modern parlance however, it refers to an instrument used for commercial debt or a real estate transaction or even bankruptcies.
The bond indenture, also known as a deed of trust, is a legal document issued to lenders. It describes key terms such as the interest rate, maturity date, convertibility, pledge, promises, representations, covenants, (negative and positive) and other applicable terms. It can be thought of as a name for the bond contract terms.
Under the Trust Indenture Act of 1939, public debt offerings In the U.S. in excess of $10 million require the use of an indenture of trust. This is necessary to establish a collective action mechanism should a default takes place such as that which occurs during bankruptcy. Under these rules, creditors can collect payment in a fair and orderly manner. Therefore, in normal economic times the contract rarely referred to.
The trust relationship does not exist between the bondholder and the issuing corporation. These two are in a regular contractual non-fiduciary, non-equity relationship. The trustee in a “trust indenture” is a third party, usually a specialist company, who is appointed by the issuer to handle and safeguard the interests of the numerous public bondholders.
Example Usage of Indenture
In an PREM14A filing made by Wright Medical (WMGI) on February 21, 2020 the section entitled “Treatment of Certain Wright Indebtedness” on page 96 refers to the outstanding indentures numerous times,
Wright has agreed not to make any change to the terms of the indentures governing its Cash Convertible Senior Notes due 2020 (which matured on February 15, 2020), Cash Convertible Senior Notes due 2021 and Cash Convertible Senior Notes due 2023 (collectively, the “Convertible Notes”) without the prior written consent of Stryker. In addition, Wright and its subsidiaries will take all actions as may be required in accordance with, and subject to, the terms of such indentures including, without limitation, delivery, issuance or entry into, as applicable, of any notices, certificates, press releases, supplemental indentures, legal opinions, officers’ certificates or other documents or instruments required to comply with such indentures. At the Offer Closing, Wright will take all necessary action to perform and comply with all of its obligations under the indentures governing its Convertible Notes within the time periods required thereby, provided that any opinions of counsel required by such indentures, or as may be required by the trustee pursuant to such indentures, will be delivered by Wright and its counsel to the extent required to be delivered in connection with the transactions contemplated by the Purchase Agreement. In addition, Wright has agreed to take all commercially reasonable actions requested by Stryker in connection with making elections under, amending, obtaining waivers, and/or unwinding or otherwise settling the hedge and warrant transactions associated with the Convertible Notes.
