|An indenture is the contract between the issuer and the bondholder specifying the issuer's legal requirements. It contains the promises of the issuer and the rights of the holder of the bond.|
Bondholders may have great difficulty in ascertaining whether the issuer has been fulfilling its obligations specified in the indenture. The indenture is thus made out to a third-party trustee as a representative of the interests of the bondholders -- a trustee acts in a fiduciary capacity for bondholders.
In an indenture there are:
- Affirmative covenants. They set forth certain actions that the borrowers must take, such as:
- Paying interest and principal on a timely basis;
- Paying taxes and other claims when due;
- Keeping assets in good conditions and in working order;
- Submitting periodic reports to a trustee so the trustee can evaluate the issuer's compliance with the indenture.
- Negative covenants. They set forth certain limitations and restrictions on the borrower's activities, such as:
- Limitations on the borrower's ability to incur additional debt unless certain tests are met;
- Limitations on dividend payments and stock repurchases;
- Limitations on sale of assets.