Note Purchase Agreement vs Indenture: Understanding the Differences

When a company needs to raise funds, it can issue securities such as bonds or notes to investors. However, to ensure that the terms of the offering are clear and legally binding, the company must draft a document that outlines the rights and obligations of both parties. Two of the most commonly used documents in this context are the note purchase agreement and the indenture. While these documents share some similarities, they also have distinct differences that are important to understand.

What is a Note Purchase Agreement?

A note purchase agreement (NPA) is a contract between a company and a single investor or a group of investors who purchase notes issued by the company. Notes are debt securities that typically have a shorter maturity than bonds and are unsecured, meaning that they are not backed by collateral. The NPA outlines the terms and conditions of the note offering, such as the interest rate, payment schedule, and any covenants or restrictions placed on the company.

One of the main advantages of an NPA is its flexibility. Unlike an indenture, which is typically used for larger bond offerings, an NPA is typically used for smaller offerings and can be tailored to the specific needs of the company and the investors. Additionally, because an NPA is a private contract between the company and the investors, it does not require registration with the Securities and Exchange Commission (SEC) and therefore offers more privacy.

What is an Indenture?

An indenture is a more complex legal document that is used for larger bond offerings. Like an NPA, an indenture outlines the terms and conditions of the offering, including the interest rate, payment schedule, and covenants. However, an indenture is a public document that must be registered with the SEC before the bonds can be sold to investors.

One of the key differences between an NPA and an indenture is that an indenture creates a trustee relationship between the bondholders and the company. The trustee is responsible for enforcing the terms of the indenture and protecting the rights of the bondholders. In contrast, an NPA does not create a trustee relationship and relies on the investors to enforce their own rights.

Another important difference is the level of detail included in the document. Because an indenture is a public document, it must meet certain legal requirements and include more detailed information about the offering, such as the use of proceeds and the risks involved. An NPA, on the other hand, can be more streamlined and focus on the specific terms of the offering.

Which is Right for Your Company?

When deciding between an NPA and an indenture, there are several factors to consider, such as the size of the offering, the number of investors, and the level of detail required. In general, an NPA may be more suitable for smaller offerings or offerings to a limited number of investors, while an indenture may be necessary for larger offerings that require more detailed disclosure.

Regardless of which document is used, it is important to work with experienced legal and financial professionals to ensure that the terms of the offering are clear, legally binding, and in compliance with all relevant laws and regulations. By taking the time to carefully draft and review the document, companies can avoid costly legal disputes and build strong relationships with their investors.