Indentures
Definition (Cause): A formal contract between issuer and bondholders.
Effect: Sets the legal framework — rights, duties, enforcement.
Purpose*: Prevents ambiguity.

Covenants

• Definition (Cause): Specific terms inside the indenture.
• Effect: They govern the issuer’s behavior during the life of the bond.

• Purpose: Protect bondholders from reckless or unfair issuer actions.

• Affirmative Covenants

  • Cause: Obligations imposed on the issuer.
  • Effect: Forces transparency and accountability.
  • Purpose: Ensures investors get necessary info and compliance.
  • Example: Provide audited financial statements.

• Negative Covenants

  • Cause: Restrictions placed on the issuer.
  • Effect: Limits risky financial decisions.
  • Purpose: Shields bondholders from dilution of claims.

  • Examples:

  • No pledging collateral twice.

  • Maintain debt/equity within limits.

Bond Trustee

• Definition (Cause): Independent party appointed in the indenture.
• Effect: Acts on behalf of bondholders collectively.
• Purpose: Centralises enforcement, since individual investors lack leverage.

Cross-Default Clause

• Definition (Cause): Provision linking defaults across multiple bonds.
• Effect: Default on one bond triggers default on others.
• Purpose: Prevents the issuer from selectively defaulting while paying other creditors.
• Example: Miss coupon on Bond B → holders of Bonds A and C can also declare default.

Pari Passu

• Definition (Cause): Clause that equalises ranking across bonds.
• Effect: New bonds cannot jump ahead of existing ones in priority.
• Purpose: Protects bondholders from subordination and preserves fairness.