Debentures
“A long term, unsecured debt instrument.”
This is the short hand basic definition of the word debenture. The word debenture usually
applies to the unsecured bonds of the corporation. As debentures are not secured by any
specific company property, the debenture holder becomes a general creditor of the firm in
the event of company liquidation.
The company does not give any collateral for the debenture, but pays a higher rate of
interest to its creditors. In case of bankruptcy or financial difficulties, the debenture
holders are paid later than bondholders. Although bonds are unsecured, debenture holders
are offered some protection by the restrictions imposed in the bond indenture, particularly
any negative pledge clause, which precludes the corporation from pledging any of its
assets ( not already pledged ) to other creditors. This provision safeguards the investor in
that the borrower’s assets will not be additionally restricted. Because debenture holders
must look to the general credit of the borrower to meet principle and interest payment,
typically only well established and credit worthy firms are able to issue debentures.
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