Supplemental indentures with consent of holders: Overview, definition, and example
What are supplemental indentures with consent of holders?
Supplemental indentures with consent of holders refer to amendments or modifications to an existing indenture (a legal agreement governing the terms of a bond or other debt security) that require approval from a specified percentage of the bondholders or noteholders. These supplemental indentures allow changes to be made to the original terms of the agreement, such as interest rates, payment schedules, or covenants, while ensuring that bondholders have a say in the process.
For example, a company may propose a supplemental indenture to extend the maturity date of its bonds, requiring the approval of holders of at least 75% of the outstanding bonds.
Why are supplemental indentures with consent of holders important?
This provision is important because it balances the issuer’s need for flexibility to amend the terms of the indenture with the bondholders’ rights to protect their interests. By requiring consent, it ensures that any changes are made transparently and with the approval of a majority (or supermajority) of the holders, preventing unilateral amendments by the issuer.
For issuers, supplemental indentures provide a mechanism to adapt to changing circumstances. For bondholders, they safeguard their investment by allowing them to review and consent to changes that may affect their rights or returns.
Understanding supplemental indentures with consent of holders through an example
Imagine a company issues bonds with a 10-year maturity but later faces financial challenges and requests an extension to 15 years through a supplemental indenture. The indenture agreement requires the consent of holders of at least 66% of the outstanding bonds for such changes. The company seeks bondholder approval, and once the required percentage agrees, the supplemental indenture is executed, extending the maturity date.
In another example, a supplemental indenture is proposed to waive a covenant requiring the issuer to maintain a specific debt-to-equity ratio. The holders of 75% of the bonds approve the waiver, allowing the issuer to operate without breaching the original terms of the indenture.
An example of a supplemental indentures with consent of holders clause
Here’s how a supplemental indentures clause might appear in an agreement:
“The Issuer and the Trustee may enter into a supplemental indenture to amend or modify any provision of this Indenture with the consent of the Holders of not less than [percentage]% of the aggregate principal amount of the Outstanding Securities affected by such amendment. No such supplemental indenture shall, without the consent of each affected Holder, (i) reduce the principal amount of any Security, (ii) reduce the interest rate, or (iii) extend the maturity date beyond the original term.”
Conclusion
Supplemental indentures with consent of holders provide a structured way to amend or update the terms of an indenture while ensuring that bondholders’ rights are respected. For issuers, they offer the flexibility to address unforeseen circumstances or adapt to changing market conditions. For bondholders, the consent requirement provides protection and transparency, ensuring that their approval is required for significant changes. Clear and detailed provisions governing supplemental indentures in agreements foster trust and cooperation between issuers and holders.
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.