4.2.1.3.2. Trust Indenture
When the governing body of the issuer approves the proposal, it signs a trust indenture, which is the issuing document for a revenue bond.
A trust indenture is a contract between the issuer and a trustee who will administer the borrowed funds as a fiduciary for the bondholders.
The trustee has power to enforce the terms of the indenture. Where a general obligation bond carries the full faith and credit of the taxing authority, a revenue bond has no such guarantee, and so a trustee is employed to look out for the interests of the investor.
While a bond resolution remains a part of the bond documentation, it only attests to the issuer’s approval and authorization of the execution of the indenture. It is the trust indenture that defines the legal terms and financing specifications of the bond.
Note: The bond resolution usually does not require voter approval in a negotiated bid.
Sample Question
After a bond counsel has examined all the information about an issuance, it might do which of the following:
I. Issue an unqualified legal opinion stating that the bond does not qualify to be legally issued
II. Issue an unqualified legal opinion stating that the bond meets all legal requirements
III. Issue a qualified legal opinion stating that the bond qualifies to be legally issued
IV. Issue a qualified legal opinion because certain financial information is missing from the official statement
A. I and III
B. I and IV
C. II and III
D. II and IV
Answer: D. An unqualified legal opinion indicates that the bond meets all legal requirements, while a qualified legal opinion might indicate that certain important information is missing in the official statement, the issuer used an accounting method that does not follow generally accepted practices, or there is a pending lawsuit that may influence the issuer’s ability to make payments.