Debt Contract Provisions

When taking on debt, companies need to understand the impact of debt contract provisions, such as bond indentures, call provisions, and sinking funds.

Bond Indentures

Call Provisions

Sinking Funds

Bond indentures are legal documents that detail the rights of each party in the agreement. Typically, indenture trustees administer the document and represent the bond holders in the arrangement. Within this document, several restrictive covenants may exist that the company must comply with to gain access to this bond issue. Trustees must ensure companies do not violate these covenants.

Call provisions allow the issuing organization to call the bond issue prior to its maturity. Typically, when an organization exercises or includes a call, the issuer must pay an amount greater than the stated value of the bond to the holders. Companies do this when the issue interest rate is higher than what they could renegotiate on the open market.

Sinking funds are provisions that provide for the systematic retirement of a bond issue. Typically, companies hold back money over time to accumulate enough in a sinking fund to pay off the issue prior to its maturity. The bond issue notifies the holder of the likelihood of a potential call prior to the maturity date.