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.
Indenture
Broad indenture definition, trade-payables carve-out
One-Sided
2023
"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...
Harvest Ventures Holding Company / PNC Bank, National Association
Loan Agreement
Sweeps in earnout and non-compete payments
One-Sided
2026
"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...
Excelerate Energy, Inc.
Fourth Amendment to Amended and Restated Senior Secured Credit Agreement
Material Indebtedness threshold for cross-default
One-Sided
2025
"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.
AERKOMM Inc. / IX Acquisition Corp.
Amendment No. 2 to Merger Agreement
M&A definition driving the closing-indebtedness adjustment
One-Sided
2025
"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...
Welltower OP LLC / Welltower Inc.
Supplemental Indenture No. 24
Funded Indebtedness measured by maturity
One-Sided
2025
"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.
Negotiate
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.
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.
FAQs
This content is for informational purposes only and does not constitute legal advice.
