Debenture
Encyclopedia
A debenture is a document that either creates a debt or acknowledges it. 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
.
Debentures are generally freely transferable
by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholder
s, 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
.
, debenture refers specifically to an unsecured
corporate bond, 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.
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'.
Corporate finance
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value while managing the firm's financial risks...
, 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
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, 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
Share capital
Share capital or issued capital or capital stock refers to the portion of a company's equity that has been obtained by trading stock to a shareholder for cash or an equivalent item of capital value...
.
Debentures are generally freely transferable
Assignment (law)
An assignment is a term used with similar meanings in the law of contracts and in the law of real estate. In both instances, it encompasses the transfer of rights held by one party—the assignor—to another party—the assignee...
by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholder
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
s, 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
Financial statements
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
.
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.
Security in different jurisdictions
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, debenture refers specifically to an unsecured
Unsecured debt
In finance, unsecured debt refers to any type of debt or general obligation that is not collateralised by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment....
corporate bond, i.e. a bond that does not have a certain line of income or piece of property or equipment to guarantee repayment of principal
Par value
Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par , over par and under par ....
upon the bond's maturity
Maturity (finance)
In finance, maturity or maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal is due to be paid....
. Where security is provided for loan stocks or bonds in the US, they are termed 'mortgage bonds'.
However, in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
a debenture is usually secured.
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
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
; 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'.
Convertibility
There are two types of debentures:- Convertible debentures, which are convertible bondConvertible bondIn finance, a convertible note is a type of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price. It is a hybrid security with debt- and equity-like features...
s 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.
See also
- Floating chargeFloating chargeA floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership , which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets...
- Security interestSecurity interestA security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
- Bond (finance)Bond (finance)In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
- Financial capitalFinancial capitalFinancial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
- StockStockThe capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...