Legal Definitions - trust indenture

A trust indenture is a formal, legally binding contract that outlines the terms and conditions of a debt offering, most commonly bonds. It is an agreement between the entity issuing the debt (the borrower, such as a corporation or government) and a trustee (typically a bank or trust company). The trustee's role is to act on behalf of the investors (the bondholders) to ensure that the issuer fulfills its obligations, such as making timely interest payments and repaying the principal amount when due. This comprehensive document details the rights and protections of the bondholders, the specific duties and responsibilities of the trustee, and the commitments made by the issuer.

• Example 1: Corporate Bond Issuance

  Imagine a large technology company decides to raise capital to fund the development of a new product line by issuing $500 million in corporate bonds to the public. To do this, the company enters into a trust indenture with a major financial institution acting as the trustee. This indenture specifies the interest rate the company will pay, the maturity date when the principal must be repaid, any assets pledged as collateral, and the financial covenants the company must maintain. It also empowers the trustee to monitor the company's compliance and, if the company were to default on its payments, to take legal action on behalf of all the individual bondholders to recover their investments.

• Example 2: Municipal Bonds for Infrastructure Projects

  A city government plans to finance the construction of a new public transit system by issuing municipal bonds. They establish a trust indenture with a designated trustee. This document meticulously details how the bond proceeds will be used for the transit project, the specific tax revenues or tolls that will be dedicated to repaying the bonds, and the schedule for interest and principal payments. The trustee's responsibility, as outlined in the indenture, includes overseeing the city's use of the funds and ensuring that the promised revenue streams are indeed collected and applied to the bond payments, thereby protecting the interests of the investors who bought the municipal bonds.

• Example 3: Securitization of Auto Loans

  A financial institution bundles thousands of individual auto loans together and sells them as asset-backed securities to investors. A complex trust indenture is created for this transaction. This indenture defines the pool of auto loans, the payment structure for distributing collections from these loans to the security holders, and the role of a trustee. The trustee is responsible for collecting payments from the car owners, managing any defaults, and then distributing the appropriate portions of these collections to the investors who purchased the securities, all according to the detailed rules set forth in the indenture.