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 his-
tory of U.S. labor. Indentured servants of the
seventeenth and eighteenth centuries were com-
monly 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 docu-
ment 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 finan-
cial organization that sells the bond to the pub-
lic), 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 corpora-
tions ACCRUE liability upon becoming bond
issuers and therefore seek to have the fewest pos-
sible restrictions placed on their business behav-
ior 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. Signifi-
cant changes in financial markets prompted
Congress to amend the TIA through the Securi-
ties 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
