Definitive notes: Overview, definition, and example
What are definitive notes?
Definitive notes are physical, paper-based securities that represent a debt obligation, such as bonds or promissory notes. These notes serve as legal proof of an issuer’s promise to repay the principal and interest to the noteholder according to the terms of the agreement. Unlike global notes, which are issued electronically and held by financial institutions, definitive notes are issued in physical form and may be transferred or exchanged individually.
For example, a company issuing long-term bonds may initially offer them in electronic form but later provide definitive notes to investors who request physical certificates for their holdings.
Why are definitive notes important?
Definitive notes provide tangible proof of a financial obligation, offering security and clarity for both issuers and investors. They are often used in structured finance, sovereign debt, and private placements where investors require physical documentation of their holdings.
For investors, holding a definitive note can offer advantages such as easier verification of ownership. However, they also come with risks, including potential loss or damage. For issuers, definitive notes may involve higher administrative costs compared to electronic securities.
Understanding definitive notes through an example
Imagine a government issues sovereign bonds to investors. Initially, these bonds are held electronically, but some institutional investors request definitive notes for record-keeping purposes. The government then issues physical certificates detailing the bond’s value, maturity date, and repayment terms.
In another scenario, a corporation raises capital through private debt issuance, offering investors definitive notes instead of electronic records. These notes serve as legally binding proof of the company’s repayment obligation, giving investors added confidence in the agreement.
An example of a definitive notes clause
Here’s how a definitive notes clause might appear in a financial agreement:
“Upon request by a Noteholder, the Issuer shall issue definitive notes in exchange for global notes, subject to applicable regulatory requirements and transfer restrictions. Such definitive notes shall be in registered form and include all terms and conditions governing the debt obligation.”
Conclusion
Definitive notes are physical securities that represent a debt obligation, offering investors a tangible record of ownership and repayment terms. While they provide greater documentation security, they also require careful handling and may involve higher administrative costs. Businesses and investors dealing with definitive notes should ensure proper safekeeping and compliance with financial regulations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.