What is Debenture?
A debenture is a debt vehicle that is backed solely by the credit worthiness of the issuer.
Debentures are issued by both corporations and governments to raise capital.
They offer regular interest payments, called coupon payments, until their date of maturity.
Purpose of Debenture
The purpose of a debenture is to raise capital through a slightly different debt structure than that of a traditional corporate bond.
Debentures offer several advantages for corporations.
For example, debentures:
- Can be used as long-term loans
- Can be issued with lower interest rates
- Have a longer repayment date
- Do not risk assets
Advantages of Debenture
Debentures also offer advantages to investors, such as:
- Payment priority over common stockholders (but not over secured bondholders)
- Regular, long-term interest payments
A debenture may also be convertible, meaning that it may be converted into equity shares after a certain date if the investor desires.
Convertible debentures are appealing to investors if they believe that the company’s stock will rise in the long term.
Convertible debentures often carry a lower interest rate than their non-convertible counterparts, however, due to the added safety of convertibility.
Disadvantages of Debenture
Debentures have some disadvantages as well. Since they are unsecured, in the event of bankruptcy, debenture holders have no guarantee of reimbursement.
Furthermore, debentures usually offer lower interest payments than traditional bonds, and payments to debenture holders are prioritized below payments to regular bondholders.