Debenture

For debentures in sport, see debenture (sport).

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A debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital.^[1] Senior debentures get paid before subordinate debentures, and there are varying rates of risk and payoff for these categories.

Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company's financial statements.

1 Attributes
2 Security in different jurisdictions
3 Convertibility
4 See also
5 References

Attributes

A movable property.
Issued by the company in the form of a certificate of indebtedness.
It generally specifies the date of redemption, repayment of principal and interest on specified dates.
May or may not create a charge on the assets of the company.^[2]
Corporations often issue bonds of around $1000, while government bonds are more likely to be $5000.

Debentures gave rise to the idea of the rich "clipping their coupons," which means that a bondholder will present their "coupon" to the bank and receive a payment each quarter (or in whatever period is specified in the agreement).

There are also other features that minimize risk, such as a "sinking fund," which means that the debtor must pay some of the value of the bond after a specified period of time. This decreases risk for the creditors, as a hedge against inflation, bankruptcy, or other risk factors. A sinking fund makes the bond less risky, and therefore gives it a smaller "coupon" (or interest payment). There are also options for "convertibility," which means a creditor may turn their bonds into equity in the company if it does well. Companies also reserve the right to call their bonds, which mean they can call it sooner than the maturity date. Often there is a clause in the contract that allows this; for example, if a bond issuer wishes to rebuy a 30 year bond at the 25th year, they must pay a premium. If a bond is called, it means that less interest is paid out.

Failure to pay a bond effectively means bankruptcy. Bondholders who have not received their interest can throw an offending company into bankruptcy, or seize its assets if that is stipulated in the contract.

Security in different jurisdictions

In the United States, debenture refers specifically to an unsecured corporate bond,^[3] i.e. a bond that does not have a certain line of income or piece of property or equipment to guarantee repayment of principal upon the bond's maturity. Where security is provided for loan stocks or bonds in the US, they are termed 'mortgage bonds'.

However, in the United Kingdom a debenture is usually secured.^[4]

In Canada, a debenture refers to a secured loan instrument where security is generally over the debtor's credit, but security is not pledged to specific assets. Like other secured debts, the debenture gives the debtor priority status over unsecured creditors in a bankruptcy; however debt instruments where security is pledged to specific assets (such as a bond) receive a higher priority status in a bankruptcy than do debentures.

In Asia, if repayment is secured by a charge over land, the loan document is called a mortgage; where repayment is secured by a charge against other assets of the company, the document is called a debenture; and where no security is involved, the document is called a note or 'unsecured deposit note'.^[5]

Convertibility

There are two types of debentures:

Convertible debentures, which are convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. "Convertibility" is a feature that corporations may add to the bonds they issue to make them more attractive to buyers. In other words, it is a special feature that a corporate bond may carry. As a result of the advantage a buyer gets from the ability to convert, convertible bonds typically have lower interest rates than non-convertible corporate bonds.
Non-convertible debentures, which are simply regular debentures, cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature attached to them. As a result, they usually carry higher interest rates than their convertible counterparts.

References

^ Legal Service India
^ Legal Service India
^ Glossary: D on the Financial Industry Regulatory Authority (FINRA) website, United States
^ What is a debenture?, Company Law Club, referring to United Kingdom usage
^ Chandra Gopalan (2007); Company Law in Singapore 3rd Edition; McGraw-Hill Education (Asia)

Bond market

Bond · Debenture · Fixed income

Types of bonds by issuer	Agency bond · Corporate bond (Senior debt, Subordinated debt) · Distressed debt · Emerging market debt · Government bond · Municipal bond · Sovereign bond

Types of bonds by payout	Accrual bond · Auction rate security · Callable bond · Commercial paper · Convertible bond · Exchangeable bond · Extendible bond · Fixed rate bond · Floating rate note · High-yield debt · Inflation-indexed bond · Inverse floating rate note · Perpetual bond · Puttable bond · Reverse convertible · Zero-coupon bond

Bond valuation	Clean price · Convexity · Coupon · Coupon yield · Credit spread · Current yield · Dirty price · Duration · I-spread · Mortgage yield · Nominal yield · Yield to maturity · Z-spread

Securitized products	Asset-backed security · Collateralized debt obligation · Collateralized mortgage obligation · Commercial mortgage-backed security · Mortgage-backed security · Yield-curve spread

Bond options	Callable bond · Convertible bond · Embedded option · Exchangeable bond · Extendible bond · Option-adjusted spread · Puttable bond

Institutions	Commercial Mortgage Securities Association (CMSA) · International Capital Market Association (ICMA) · Securities Industry and Financial Markets Association (SIFMA)