Indebtedness Clause

Defines which financial obligations count as debt under the contract, so leverage, default, and purchase-price calculations use the same list.

Reviewed by GC AI Solutions Team•Updated September 2026

Definition

An indebtedness clause is the defined term that tells you what counts as debt inside a credit agreement, indenture, merger agreement, or purchase agreement. It usually reaches past bank loans to capture capital leases, guarantees, reimbursement obligations under letters of credit, deferred purchase price, earnouts, and hedging exposure, then carves out items the parties agree are not really borrowings, such as ordinary-course trade payables. Because dozens of downstream provisions reference it, including negative covenants, financial ratios, cross-default triggers, and the closing-indebtedness adjustment in an acquisition, the definition does quiet structural work far beyond its length. Get the definition wrong and a routine trade payable can trip a leverage covenant, or a real obligation can slip outside a lender's controls. This is the workhorse defined term of leveraged finance and M&A, and it rewards close reading.

What It Does

The clause converts a loose word, “debt,” into a precise, enforceable list. Every covenant that limits, measures, or represents debt then points back to this one definition, which is why lenders draft it broadly and borrowers negotiate the carve-outs. A typical indebtedness definition sweeps in the following categories.

Funded debt for borrowed money. Term loans, revolving borrowings, bonds, notes, and debentures, plus accrued interest, fees, and costs on those obligations.
Capital and finance leases. Lease obligations that GAAP requires to be capitalized on the balance sheet, distinguished from ordinary operating leases.
Guarantees and contingent obligations. Debt of a third party that the obligor has guaranteed, backstopped, or otherwise made itself directly or indirectly liable for.
Letters of credit and reimbursement obligations. Amounts the obligor must repay under any letter of credit, bankers' acceptance, or similar instrument.
Deferred purchase price and earnouts. Amounts owed for property or services acquired but not yet paid, including earnout and non-compete payments once they land on the balance sheet, but excluding ordinary trade payables.
Hedging and swap exposure. Mark-to-market obligations under interest rate, currency, or commodity swaps, measured as the amount payable on early termination.

When You'll See It

The indebtedness definition anchors four documents in particular: credit agreements, M&A representations and warranties, subordination and intercreditor agreements, and stock and asset purchase agreements. In credit agreements, it feeds the debt-incurrence covenant, the leverage and interest-coverage ratios, and the cross-default clause, so it governs what the borrower may take on and how the lender measures risk. In M&A representations and warranties, a seller reps its outstanding indebtedness, and the parties use the same term to compute the closing-indebtedness adjustment that moves real dollars at closing. In subordination and intercreditor agreements, it separates senior from junior obligations and sets what each lender may collect and when. In stock and asset purchase agreements, it defines "Closing Indebtedness" or "Funded Debt" for the purchase-price bridge from enterprise value to equity value.

Examples

Humana Inc.

IndentureBroad indenture definition, trade-payables carve-outOne-Sided2023

"Indebtedness" means, with respect to any Person (without duplication): (1) any liability of that Person (A) for borrowed money, or under any reimbursement obligation relating to a letter of credit or similar instrument; (B) evidenced by a bond, note, debenture or similar instrument; (C) to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business; or (D) for the payment of money relating to any obligations under any capital lease of real or personal property which has been recorded as a capitalized lease obligation; (2) any liability of others described in the preceding clause (1) that the Person has guaranteed or that is otherwise its legal liability or which is secured by a lien on that Person's Property...

Source

Harvest Ventures Holding Company / PNC Bank, National Association

Loan AgreementSweeps in earnout and non-compete paymentsOne-Sided2026

"Consolidated Funded Indebtedness" means, as of any date of determination, for the Guarantor and its Subsidiaries on a Consolidated basis, the sum of, without duplication, (a) all liabilities, obligations and indebtedness for borrowed money including, but not limited to, obligations evidenced by bonds, debentures, notes or other similar instruments of any such Person, (b) all purchase money Indebtedness, (c) all obligations to pay the deferred purchase price of property or services of any such Person (including all payment obligations under non-competition, earn-out or similar agreements, solely to the extent any such payment obligation under non-competition, earn-out or similar agreements becomes a liability on the balance sheet of such Person in accordance with GAAP), except trade payables arising in the ordinary course of business not more than ninety (90) days past due...

Source

Excelerate Energy, Inc.

Fourth Amendment to Amended and Restated Senior Secured Credit AgreementMaterial Indebtedness threshold for cross-defaultOne-Sided2025

"Material Indebtedness" means (a) the Specified Jamaica Acquisition Indebtedness and (b) any other Indebtedness (other than the Loans and Letters of Credit), or obligations in respect of one or more Swap Agreements, of any one or more of Parent, the Borrower and its Restricted Subsidiaries in an aggregate principal amount exceeding $50,000,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of Parent, the Borrower or any Restricted Subsidiary in respect of any Swap Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that Parent, the Borrower or such Restricted Subsidiary would be required to pay if such Swap Agreement were terminated at such time.

Source

AERKOMM Inc. / IX Acquisition Corp.

Amendment No. 2 to Merger AgreementM&A definition driving the closing-indebtedness adjustmentOne-Sided2025

"Indebtedness" means with respect to any Person, (a) all obligations of such Person for borrowed money, including with respect thereto, all interests, fees and costs, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, (d) all obligations of such Person issued or assumed as the deferred purchase price of property or services, (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any lien or security interest on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (f) all obligations of such Person under leases required to be accounted for as capital leases under U.S. GAAP, (g) all guarantees by such Person of the Indebtedness of another Person, (h) all liability of such Person with respect to any hedging obligations...

Source

Welltower OP LLC / Welltower Inc.

Supplemental Indenture No. 24Funded Indebtedness measured by maturityOne-Sided2025

"Funded Indebtedness" means as of any date of determination thereof, (i) all Indebtedness of any Person, determined in accordance with GAAP, which by its terms matures more than one year after the date of calculation, and any such Indebtedness maturing within one year from such date which is renewable or extendable at the option of the obligor to a date more than one year from such date, and (ii) the current portion of all such Indebtedness.

Source

Negotiate

Borrower and Seller Positions:

Carve out ordinary trade payables. Payables incurred in the ordinary course and not overdue past a stated grace period, 60 or 90 days is common, should not count. The XPEL definition above uses a 90-day line.
Exclude operating leases. Only capitalized or finance leases should count as debt. The Welltower definition expressly excludes operating leases, and post-ASC 842 borrowers should confirm the definition tracks finance leases, not every right-of-use asset now on the balance sheet.
Exclude intercompany debt. Obligations between the borrower and its own subsidiaries, or among guarantors, should be disregarded so internal financing does not inflate reported leverage.
Cap or exclude contingent earnouts. Argue that earnout and non-compete payments count only when fixed and payable, not while contingent, so an unearned earnout does not distort a covenant.
Exclude undrawn commitments and accrued-but-unpaid items. Only funded amounts should count, so an unused revolver or an undrawn letter of credit does not consume the debt basket.

Lender and Buyer Positions:

Reach guarantees and contingent liabilities. Insist that guaranteed debt, keep-well arrangements, and take-or-pay obligations count, so off-balance-sheet support cannot escape the covenants.
Include hedging on a mark-to-market basis. Capture swap exposure measured at the termination amount, as Excelerate does, so a large derivative position is visible.
Size the materiality basket to the deal. Set the "Material Indebtedness" cross-default threshold low enough to catch obligations that matter for this credit, not a boilerplate number carried over from a larger borrower.
Add an anti-duplication and anti-avoidance backstop. Keep "without duplication" language so the definition never double-counts an item, and pair it with a catch-all so novel structures still fall inside.

In an acquisition, the seller wants the closing-indebtedness list short so the purchase price is not reduced, and the buyer wants it long so every debt-like obligation flows through the price bridge. Reconcile the indebtedness definition with the representations and warranties and the indemnification provisions before signing, because a mismatch between what the seller reps and what the price adjustment captures is a classic post-closing dispute. Teams that redline these definitions inside GC AI for Word can compare a proposed definition against their standard positions in one pass.

Red Flags

No trade-payables carve-out. A definition that omits the ordinary-course carve-out can sweep routine vendor invoices into the debt covenants and manufacture a default from normal operations.
Operating leases pulled in. Language that captures “all lease obligations” rather than only finance or capitalized leases can, under ASC 842, treat ordinary real-estate and equipment leases as debt.
Double-counting risk. A definition missing “without duplication” can count the same obligation twice, once as borrowed money and again as a guarantee or a secured amount, overstating leverage.
No materiality threshold on cross-default. Without a “Material Indebtedness” basket, a small, technical default on a minor obligation can trigger a cross-default across the entire facility.
Uncapped contingent obligations. Earnouts, guarantees, and hedging counted at maximum contingent exposure, with no cap or “when fixed” trigger, can consume debt baskets that were sized for funded borrowings.
A catch-all with no anchor. A pure “any other obligation that would be considered indebtedness” phrase, untethered to GAAP or an enumerated list, invites disputes about what the parties agreed to count.
Disqualified stock left out. Mandatorily redeemable or redeemable preferred stock functions like debt once it must be repaid on a set date, but a definition silent on “Disqualified Stock” can let it sit outside the indebtedness calculation and understate real leverage.

Indebtedness Clause FAQs

What is an indebtedness clause?

An indebtedness clause is the defined term in a credit agreement, indenture, or purchase agreement that specifies which financial obligations count as debt. It typically covers borrowed money, capital leases, guarantees, letters of credit, deferred purchase price, and hedging exposure, and it feeds every covenant, ratio, and representation that measures debt.

What counts as indebtedness in a credit agreement?

In most credit agreements, indebtedness includes borrowed money, bonds and notes, purchase-money obligations, capital or finance leases, reimbursement obligations under letters of credit, guarantees of third-party debt, and mark-to-market swap exposure. Ordinary-course trade payables are usually carved out, as in the Humana and XPEL definitions above.

Do trade payables count as indebtedness?

Well-drafted definitions exclude ordinary-course trade payables, often those not overdue past a 60 or 90 day grace period. If the definition omits that carve-out, routine vendor invoices can be counted as debt and can trip leverage covenants, which is why borrowers negotiate the exclusion.

What is the difference between indebtedness and funded debt?

Funded debt, sometimes called Funded Indebtedness, is the subset of indebtedness that matures more than one year out, plus the current portion of that long-term debt. The Welltower indenture defines it by maturity. Broad Indebtedness is wider and captures short-term and contingent obligations as well.

What is a material indebtedness threshold?

A Material Indebtedness threshold is a dollar basket that determines which debts are large enough to trigger cross-default and similar provisions. Excelerate Energy sets its threshold at obligations exceeding $50,000,000. Sizing the basket correctly keeps a minor, technical default from accelerating the entire facility.

How is indebtedness defined in an M&A purchase agreement?

In an acquisition, Indebtedness or Closing Indebtedness drives the purchase-price adjustment from enterprise value to equity value. The IX Acquisition merger agreement above captures borrowed money, conditional-sale obligations, capital leases, guarantees, and hedging. Sellers push to keep the list short, and buyers push to make it comprehensive.

What's the best AI to review an indebtedness clause?

Look for a legal AI platform built for in-house teams that can run a custom Playbook against the definition, not just summarize it. In GC AI for Word, a Playbook built on the red flags above checks a proposed indebtedness definition for a missing trade-payables carve-out, operating leases swept into the debt calculation, absent without duplication language, and an uncapped earnout, then flags each against your team's standard position. Exact Quote pulls the flagged language character for character, so you can verify the read before you rely on it.

Related Clauses

This content is for informational purposes only and does not constitute legal advice.