debenture

Definition of debenture

Etymology

Originally debentur, from Latin debentur (“there are owing”), supposedly the first word of such a document in early times.

Pronunciation

• (UK) IPA: /dɪˈbɛntjʊə/, /dɪˈbɛntʃə/

Noun

debenture (plural debentures)

1. A certificate that certifies an amount of money owed to someone; a certificate of indebtedness.
2. (obsolete) A certificate of a loan made to the government; a government bond.
   
   * 1942, Elliot Paul, The Last Time I Saw Paris, Sickle Moon 2001, p. 72:
   Madame Corre, who made the important decisions after her plodding husband had spent hours on the ledger, sold the family debentures and put the money into Dutch decurities.
   
   
3. (finance) A type of bond secured only by the general credit or promise to pay of the issuer, now commonly issued by large, well established corporations with adequate credit ratings.

Further reading

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 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.

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 States, 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'.

Convertibility

There are two types of debentures:

1. 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.
2. 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.