Debenture Terminology for Investors
A Debenture is unsecured debt instruments and Debenture terms are important for the investor like you and me to know before investing with Bonds. Bonds or Debenture are tools to raise funds and issued by issuing organization to the general public. If a company gets Bankrupt and cannot repay the loan to investors, in that case, the debenture holder will get priority in repayment by the company. Out of many types of debentures, there are many terms associated with :
The Bond Indenture is a term used for the legal contract linked to the Bond or document issued by the company to its investors and it involves details regarding Bond. Details included are like:
- Description of the Bond and its characteristics.
- Limitations imposed on the issuing organization.
- Benefits to the bondholder/investor after maturity date liable to be paid by the company.
- Terms and Conditions to be fulfilled by an investor to make self eligible for due benefits.
- Type and term of action to be action against issuer if the company fails to complete its pre-decide payments to its consumers.
- The exact date when the company is supposed to complete its payout to the consumer.
- Organization and purpose of the company by particular bond
- Any other conditions and terms to which both parties must abide by during the bond period.
So, if at all any conflict arises between the issuer and investors then this Bond indenture will act as a reference document in solving that conflict. Normally this document is not of importance till the time any special event takes place like when it seems to you that issue is not abiding by the rules laid down in contract etc.
Types of Indentures
Indentures issued by the company varies depending on the sphere in for which bond is issued. Different types of Indenture and its associated articles linked to it are as discussed below :
Real Estate Indenture
In real estate related businesses, an indenture is like an endeavor for both the parties’ i.e issuer and investor to be abided by the long-term commitment or can say for mutual obligations. For example, Issuer may agree to maintain a property while an investor may agree to pay for that particular property.
In bankruptcy law, it is a legal status to any entity which is not able to clear his debts which entity cannot repay its investors. In bankruptcy, the nonessential assets like property and other excess income will be used by the government to pay investors and after closing, all the dues stand cleared. So indenture is mentioned with all the minute details regarding the bankruptcy of the organization and how the investor to be paid off.
It is a legal contract used normally for the sake of bond issuers and bondholders where all the details related to the credit offer is included. It includes all the credit offering related mentions and terms in detail and same is issued for non secured bonds with the name of Debentures.
Credit Indenture is an important part of any Bond and it includes all the legalities regarding credit in it like:
- Date of Maturity of Bond
- Formulae or process used to estimate the interest
- Timing when Interest is to be paid to investors by the issuer
- If any convertible feature associated with the bond, then same will be included here
- Other terms that may also be associated with credit indenture clauses can include:
is a term for the bond contract that permits the issuer of the bond to use the collateral guaranteed in one issue as collateral for any number of other bond issues in the future. It is normally viewed as a sign of financial insecurity in any organization, make bond risky and that is the sole reason that Interest rates for the bonds issued under these terms will be higher as compared to other bonds. So investors must have full faith in the organization issuing this type of bond or should go through detailed contract and information before investing in an open-ended indenture.
Close ended indenture
On the other hand, a close-ended indenture is termed for a legal contract that specifies that collaterals used to secure the bond issue will not be used again to back the issues with other bonds. It is just opposite to the open-ended indenture where it makes bonds less risky and so the interest rate of the bond will be lower comparatively.
Indenture trustee or trustee of bond
A trustee indenture is the same as a bond indenture and it is issued only where there is trust hired by the bond issuer to look after the management of bond. So it is also like an agreement in a bond contract but it is made between a bond issuer and a trustee which will contain all the responsibilities of the trustee in looking over for bond and what all expected out of him from the bond issuer.
All the terms and conditions will be laid down in it to which both parties’ i.e trustee and issuer must abide by. Here, the trustee uses to look after and manage the rate of interest, request of redemptions by investor and communiqué to an investor for all those matters.
Registered Bond or Fully Registered Bond
It is a tool by which the company issuing the bond will keep all the details or can say hold complete records with it with respect to any bondholder. In this bond, all the records pertaining to investors are kept recorded to make sure that the issuer is making the interest payment to the eligible and right investor only.
It is beneficial for both parties i.e issuer and investor that all the details available with the company so no need for physical documents to communicate.
This type of bond purely belongs to the owner of the record, and when the registered bond is sold, the same time records in respect of possession are modified so as to indicated the transfer of possession.
It is a term used for the bond issued by a business organization to investors where the issuer doesn’t keep and track any type of records and details with respect to investors. It is payable to the holder and keeps on changing as and when the transaction happens with respect to that particular bond. In the event of loss of the certificate issued by the company, an issuer is still liable to pay the interest payments to the investor and so the investor is safe.
It is a type of Bearer bond only which is debt commitment or contract with rates and cycle of interest payable to investors attached. There is no record kept saved by an issuer with respect to investors and investors will receive the coupons or interest timely from the issuance of bond till maturity.
Convertible and Non Convertible Bonds
In the case of Convertible debentures, the investor or bondholder has a right to convert its Debenture into equity stock of the company while he has no such right in case of non-convertible debentures.
The rate of interest is low in a convertible while high in non-convertible because of no option to switch in equity option.
The amount of maturity in the case of convertible depends on the value of the stock of the company and will get higher if stock is high or vice versa. But in the case of non-convertible debenture, an investor will get a fixed maturity amount as pre-decided depend on the rate of interest prevailing.
If the stock of the company falls or worsens, the convertible debenture holder has an option to convert into stock and sell in the market while non-convertible one has to wait till maturity. And in case of stock worsens, the company may default its interest payment as well so a loss to the non-convertible holder.
Convertible bondholder becomes Investor and then owner of the company by converting the debenture into shares but non-convertible bondholder will always be an investor to the company and has no ownership.
It is another type of bond in which it is backed by a mortgage or a group of mortgages which in turn backed by property or real estate. So in the event of bankruptcy of default, the bondholder can sell these mortgages to compensate for the losses. These types of bonds are backed by immovable property so secure than other types of bonds which results in a low rate of return for it.
It is sometimes called a serial note as well, type of debt security which is matured at a fixed interval and interest for the same is payable to the creditors at fixed intervals. That means its maturity amount is paid back to the creditors in many intervals or terms and not in just a single term.
The terms discussed above are widely used in the Debenture or Bond market and you must be well aware of these before investing in them. As already discussed in earlier blogs the Security Market is closely observed and regularised by an autonomous body called SEBI which keeps a close watch on the happenings in the market.