What are indentures?

bond indenture also contains all the

terms and conditions applicable to
- A legal and binding agreement,
the bond issue. Other critical
contract, or document between two or
information included in the
more parties.
indenture are the financial
- Traditionally, these documents featured
covenants that govern the issuer
indented sides
and the formulas for calculating
- Indenture most commonly appears in
whether the issuer is within the
bond agreements, real estate deals, and
covenants (usually ratios based on
some aspects of bankruptcies.
corporate financials). Should a
- It provides detailed information on
conflict arise between the issuer
terms, clauses, and covenants.
and bondholder, the indenture is
TYPES OF INDENTURES
the reference document utilized for
1. Real Estate Indenture - In real
conflict resolution.
estate, an indenture is a deed in
which two parties agree to
continuing obligations. For example,
In the fixed-income market, an
one party may agree to maintain a
indenture is hardly ever referred to
property and the other may agree
when times are normal. But the
to make payments on it.
indenture becomes the go-to
2. Bankruptcy Indenture - In
document when certain events take
bankruptcy law, an indenture may
place, such as if the issuer is in
be referenced as proof of a claim on
danger of violating a bond
property. Indentures in general
covenant. The indenture is then
provide details on collateralized
scrutinized closely to make sure
property, constituting the claim a
there is no ambiguity in calculating
lender has against a debtor, usually
the financial ratios that determine
secured with a lien on the debtor's
whether the issuer is abiding by the
property.
covenants.
3. Credit Indentures - A credit
Why Bond indentures are
indenture is the underlying contract
agreement that details all of the important to investors?
provisions and clauses associated
The majority of local investors opt to
with a credit offering. In non-
secured, uncollateralized bond disregard to give the necessary importance
offerings, these indentures can also to the indenture, or locally better known as
be called debentures. the prospectus or offering document.
Typically, a credit indenture is used Unfortunately, other investors literally
for the sake of bond issuers and ignore the document and invest blindly in a
bondholders. It specifies the particular issue.
important features of a bond, such
as its maturity date, the timing of Looking at bonds, the indenture is a legally
interest payments, method of binding document between two parties, in
interest calculation, callability, and this case the bond issuer and investor. This
convertible features-if applicable. A document includes very important features,
which an investor should be aware of and in place to safeguard investors against
feel comfortable with prior to investing. possibly any actions by management which
What investors usually look at are the could be detrimental towards the
popular features such as the bond’s company’s financial sanity.
maturity date, timing of interest payments
(whether The most common negative covenants are
financial ratios that a company must
annually or semi-annual) and the use of maintain. One of the most popular ratio is
proceeds, i.e. the main reason behind why the interest coverage ratio, i.e. how many
the company is borrowing money from the times the company can cover its interest
public. payments from its operations. In this
regard, an example would be that a
Unfortunately, despite these being company must maintain its coverage ratio
important concepts which investors are at 3x as of the date of the financial
familiar with, other very important features statements. Such covenants should be
in the document are usually ignored, for strictly adhered to throughout the tenor of
one reason or another. It could be that the the bond and can only be ratified by
financial jargon used in the document is bondholders’ approval, which usually get a
difficult for an investor to understand, or it so-called consent fee for accepting the
is also possible that investors do not want amendments. It is important to understand
to delve into much detail. that the said covenants cannot be amended
by shareholders or the board of directors.
One of the most important features that
investors should search for is whether the Another important negative covenant is the
bond has a callable option. A callable adherence to certain debt ratios. This is
feature gives the right to the issuer to call very important for investors to look for as it
the bond prior maturity at pre-defined impedes the company from incurring
dates and price levels, usually with a so- further debt. Note that the incurrence of
called non-call period. For the avoidance of more debt can put pressure on the current
doubt, for instance, a bond with a 10-year bond investors, and place them in a worst
maturity can be called following three years position than when the bond was issued.
from issuance at the agreed price level, a That said, some sort of loopholes do exist
feature that is found in the said indenture. to a certain limit. In fact, a particular clause
better known as carve-out gives the
Other important features within the
opportunity to the issuer to incur further
document are covenants, which restrict the
debt under certain circumstances. For
company from certain activities. Covenants
instance, increasing a revolving credit
are dissected into affirmative and negative
facility in order for the company to be more
covenants. Affirmative covenants, are
comfortable to manage its day-to-day
usually clauses that require the borrower to
working capital needs.
perform certain actions, for instance to
provide the lender with audited financial Luckily enough for local investors, the
statements. Whereas negative covenants are above financial jargon is merely found
under local issuance, whereas the said
clauses are the norm for foreign bonds.
Unfortunately, locally investors tend
ignore the above aforementioned points
and at times when the company opts to
implement any option within
prospectus, they tend to be surprised and
query if this could be done. 
In my view, investors should
indeed allocate time in reading
the prospectus and be well-
informed prior investing. As the
said clauses might not be in line
with the investor’s expectation.
If the jargon used in the
prospectus is difficult to
understand, investors should
seek professional advice.
COUPON BOND
What is a Coupon Bond?
A coupon bond is a type of bond that
includes attached coupons and pays
periodic (typically annual or semi-annual)
interest payments during its lifetime and its
par value at maturity. These bonds come
with a coupon rate, which refers to the
bond’s yield at the date of issuance. Bond
A coupon bond is a type of bond that
includes attached coupons and pays
periodic (typically annual or semi-annual)
interest payments during its lifetime and its
par value at maturity. These bonds come
with a coupon rate, which refers to the
bond’s yield at the date of issuance. Bonds
that have higher coupon rates offer
investors higher yields on their investment.s
that have higher coupon rates offer
to investors higher yields on their investment.
How Does a Coupon Bond Work?
the
Upon the issuance of the bond, a coupon
rate on the bond’s face value is specified.
The issuer of the bond agrees to make
annual or semi-annual interest payments
equal to the coupon rate to investors. These
payments are made until the bond’s
maturity.
Let’s imagine that Apple Inc. issued a new
four-year bond with a face value of $100
and an annual coupon rate of 5% of the
bond’s face value. In this case, Apple will
pay $5 in annual interest to investors for
every bond purchased. After four years, on
the bond’s maturity date, Apple will make
its last coupon payment. It will also pay the
investor back the face value of the bond.
3 TYPES OF MATURITIES
- The maturity date is the date on which the
principal amount of a note, draft, acceptance
bond or other debt instrument becomes due.
On this date, which is generally printed on the
certificate of the instrument in question, the
principal investment is repaid to the investor,
while the interest payments that were regularly
paid out during the life of the bond, cease to
roll in. The maturity date also refers to the
termination date (due date) on which an
installment loan must be paid back in full.
The maturity date refers to the moment in time
when the principal of a fixed income instrument
must be repaid to an investor.
The maturity date likewise refers to the due
date on which a borrower must pay back an
installment loan in full.
The maturity date is used to classify bonds into
three main categories: short-term (one to three
years), medium-term (10 or more years), and
long term (typically 30 year Treasury bonds).
Once the maturity date is reached, the interest
payments regularly paid to investors cease since
the debt agreement no longer exists.
Classifications of Maturity
Maturity dates are used to sort bonds and other
types of securities into one of the following
three broad categories:
- Short-term: Bonds maturing in one to
three years
- Medium-term: Bonds maturing in 10 or
more years
- Long-term.: These bonds mature in
longer periods of time, but a common
instrument of this type is a 30-year
Treasury bond. At its time of issue, this
bond begins extending interest
payments--generally every six months,
until the 30 years loan finally matures.
This classification system is widely used across
the finance industry, and appeals to
conservative investors who appreciate the clear
time table, as to when their principal will be
paid back.
Difference between Bonds and Promissory
Notes
Promissory Note
In its broadest form a promissory note is
nothing more than a written promise to repay a
debt. The agreement could be between two
individuals. For example, if you sell your car to
an individual and agree to finance the car for
that person, you might have him sign a
promissory note detailing the terms of the loan.
You might have signed a master promissory
note with the U.S. Department of Education if
you took out a national direct student loan. In
the world of corporate finance, companies
sometimes use promissory notes as a means of
alternate financing rather than borrowing from
a bank or issuing bonds.
Bonds
A bond is a more formal type of debt
instrument. When you buy a bond you're
loaning money to the issuer, which could be a
corporation or government, in exchange for
regular interest payments plus the return of
your principal. The terms, such as the bond's
maturity date, interest rate, interest payment
dates and and special features -- including call
or early redemption options -- are detailed in
the bond's indenture.
PDEX-Institution that facilitates the trading
Securitization
Conversion or transformation of wat…..
Convert asset or loans
Pinopool of asset to issue bonds
Pooling of asset
Issuer consolidate asset such as illiquid asset
like land or property (has respective value
based on appraised value) to issue bonds,
aggregate or pooling, ung worth na un ang
iissue nya as bond (asset in a form of land),
secured sya- ASSET BACKED SECURITIES (ABS)
(back up sya ng securities ng companies, ung
land or property mismo ung pang back up)
The issuer becomes defaulted, the property can
be sold and pedeng ibenta to pay the holder
Two parties:
Issuer (debtor)
Holder (investor, creditor)
Other than land, other assets can be use as back
up: (appraised based on APPRAISED OR
MARKET VALUE)
Auto-loans
Vehicles
Geared towards LOANS- MORTGAGE BACKED
SECURITIES
May pinautang at documented through the
mortgage, ang inissue ay based on the existing
na utang ng debtor
FACILITIES- MORTGAGE BACKED SECURITIES
Trading 15 years much longer
Ung payment ang assurance
UNSECURED- debentures
SECURED- ABS AND MBS
Debentures- credit rating and establishing its
credibility
San Miguel issues debentures
It’s okay as the company is well known, and
Is absent for defaults.
Benefit kahit na walng collateral- kapag
pinautang ang ph dahil mataas ng credit rating,
mababa ang interest rate na ibibigay
Securitization
different denomination and maturity
Book runners
The ones that are issuing/ promoting these 2
investors
may be banks or other institutions
Limitations
Securitization can also be risky
ABS
Riskiness: there are assets to depreciate kasi
nakabase sa appraised value
Minatch ung value ung asset and the bonds-
pero not the same after next years
May chance na madefault
MBS
Riskiness: na di makabayad ung borrowers
Collect the amoritzation that may borrowoers
are to remit, wat hahahah
interest - babayaran ang interest ng bond
holders in a form of coupon
Coupon payments
interest payment in bonds
 Summary sya kasi consolidate information

Debentures- interest depends on the credit

ating nd integrity of the firm

Mas common ang scripless kausa sa ceritficated

Long-term

HUGE AMOUNT OF MONEY

Bond runners

Other financials institution or banks na sila

nagbebenta ng bonds na galing sa underwriters

Underwriters- investment banks: sila ung

magbebenta ng bonds

Bonds are under indebtedness

Bond

Presence of indebtures (compared sa

promissory notes)

Indentures

Legal contract

Bond price, maturity date, etc…

Covenants are part of bond indentures

Clauses of presenting of the dos and the don'ts

of both parties unless u watn to scrutinize

Bond prospectus

Summarized and simpler version of the

Indentures pero not necessary na maigsi

Extensive document