Indenture/Credit Agreement

Components of a bond indenture/credit agreement

A bond indenture is a contract between the issuer and bond holder that governs the terms of the bond. For loans, it is the credit agreement. These are written by lawyers and are not easy to read. However, most of these documents are similar because they basically use the same underlying template with minor variations. If the loan is secured, you will also need to read the security and collateral agreement to learn which assets secure the claim.

The most important part of the indenture/credit agreement is the covenant section. There are slight differences between the credit agreement and indenture but both have similar structures.

Title page – name of borrower, guarantors, trustee, closing date of loan, agent banks on the loan. It is important to determine who the issuer is for purposes of structural subordination.

Table of contents list of articles or sections in the indenture/credit agreement.

Recitals – tells you the reason for the loan and a bit of history of transactions leading up to this one.

Article 1: Definitions and incorporation by reference

Every capitalized term in the document is usually defined in this section. Important defined terms include the definition of Total Debt, Fixed Charges and EBITDA for purposes of calculating the negative covenants.

Generally, the issuer wants EBITDA to be defined as broadly as possible and fixed charges to be as narrow as possible so that EBITDA/Fixed charges can be high.

Article 2: Terms of the loan (Credit Agreement)/The Notes (Indenture)

See Terms of the Loan

Article 3: Conditions precedent (Credit Agreement Only)

The conditions precedent in a credit agreement are a simplified closing list of things that have to be in place before the loan gets funded. The conditions specify what documents the borrower must deliver to the lenders, what actions it must take, and what other circumstances must exist in order for credit to be available.

Signing versus closing – most credit agreements are signed and closed on the same day. However, some credit agreements including LBOs and non-US borrowers may be signed in advanced of the effective date.

MAC clause – Lenders usually insist that the credit agreement conditions protect against the borrower’s suffering what is called a Material Adverse Change clause.

Perfection of Collateral

If a facility is to be secured, the conditions precedent normally require evidence of two things: first, that each lien granted to the lenders has been perfected and second that it has the agreed upon priority over other liens on the property.

Perfection means that steps have been taken to give public notice of the security interest and to make it enforceable against other creditors of the borrower. Lenders will also insist that lien searches be conducted to ensure that the lien is first in priority.


Appraisals are not commonly required as a condition to the extension of credit under an agreement with 2 exceptions 1) asset based lending and 2) loans are made against the security of real property.


A reason why there is a clause in the credit agreement stating the borrower is solvent is to give lenders independent confirmation that they could show later to a court to demonstrate that borrower’s financial condition at the time of the loan closing and show that it was solvent. This is to determine whether fraudulent conveyance has occurred. Other checks for the lender include environmental due diligence, insurance, patriot act, and the catchall.


A credit agreement becomes effective as a contract when all parties have executed and delivered counterparts. However, the obligation of the lenders to extend credit does not become effective until the borrower satisfies all of the effectiveness date conditions.

Article 4: Representations and warranties (Credit Agreement Only)

The organization in existence representation tells the lenders 4 things about the borrower 1) that it is organized, 2) that it exists, 3) that it has certain powers and 4) that it is qualified to do business where required.

Other representations needed from the borrower include financial statements, litigation, licenses, capitalization, subsidiaries, real property, existing debt and liens, etc.

Article 5: Covenants

See page on Covenants

Article 6: Events of default

See Events of Default

Article 7: The agent

Article 8: Amendments, supplements and waivers

Bank Agreements

The agent may waive certain technical defaults or restructure non-material terms on behalf of the lending group.

A majority or super-majority needed for material modifications including:

  • Forgiveness of interest or principal
  • Extension of maturity or other payment dates
  • Adjustment of voting requirements for admendments, waivers and responsive actions
  • Release of collateral or guarantee
  • Change in seniority or subordination
  • Modification of mandatory redemption provision

Bond indentures

  • Voting levels are usually 100% for material changes and 50% for other amendments and waivers.
  • Bondholder retains individual right to sue for payment of interest and principal when due
  • Other rights including acceleration, subject to vote requiring minimum threshold (usually 25%), creates demand of action upon Trustee; acceleration makes notes immediately due and payable
  • Restructure to avoid default and accerleration can often be effected in spite of non-compliant noteholders, through coercive tender offer.

Article 9: Guarantees

Guarantee – Credit agreement guarantees vary in length from a few lines to many pages. When more than one guarantor guarantees an obligation the undertaking is generally expressed as “joint and several”. Each guarantor is independently obligated for the full amount. For JVs, it is not unusual for each JV partner to be severally obligated to its percentage ownership.

Many guarantees state expressly that the guarantor is obligated to pay interest accruing on the loan after commencement of a bankruptcy or insolvency proceeding.

Guarantees are almost always guarantees of payment rather than guaranteed of collection. In guarantee of payment, the guarantor becomes obligated to make the payment on the obligation. In guarantee of collection, the lender is required to exhaust all remedies before it can make a claim.

Waivers – At common law, guarantors are favored over the beneficiaries of guarantees. Therefore, many credit agreements include waivers of common law defenses.

Subrogation – When a guarantor pays off the lender, it assumes the obligation so the borrower now owes the guarantor. This is called subrogation and happens at the time of payment. Some credit agreements states subrogation happens only after the lender gets repaid.

Reinstatement – Under bankruptcy code, if a borrower pays a lender within three months of bankruptcy, the bankrupt estate may be able to get that payment back. The credit agreement may state that the guarantor is reinstated if that were to happen.

Guarantees can be 1) upstream (when a sub guarantees a parent), 2) Cross-stream (one sub guarantees another sub) or 3) downstream (when a parent guarantees a sub). For upstream guarantees, it could be challenged under fraudulent conveyance because the sub could be seen as insolvent at the time of the guarantee if the amount of the guarantee is greater than its book value.  This is even more troublesome for foreign subs.

Deemed dividends

A loan to a US borrower that is guaranteed by a non-US subsidiary may raise the so called deemed dividend problem. Under section 956 of the US IRS code, a guarantee from a non-US subsidiary controlled by a US company is generally deemed to be a dividend by the subsidiary to its US parent of the earnings and profits of the subsidiary.

As a consequence, most guarantees of debt of a US borrower are restricted to its US subsidiaries.

The deemed dividend problem can also surface if a US borrower pledges the equity of a non-US subsidiary. A pledge of more than 66.67% of the total combined voting power of the non-US subsidiary is deemed to be a dividend to the same degree as a guarantee by the subsidiary.

To avoid this, security agreements customarily limit the percentage of equity pledge to 65%. Also, customarily the carve out above 65 percent applies to all equity capital of the non-US subsidiary.

See more on Guarantees

Article 10: Miscellaneous