Debentures are a type of Debt Instrument, similar to a Bond, that companies issue in order to raise capital. Details of Debentures are documented in an indenture, which is a written agreement between the issuer and the holder. Companies pay investors interest for the term of the Debenture. At the end of the lending period, issuing companies usually offer the choice of converting the Debentures into Shares. Debentures are not secured by physical assets or collateral. Investors can buy and sell Debentures through a JSE equity market member.
Who is this for?
Investors who are looking for a fixed income derived from interest which is unrelated to the issuing company’s performance and for investors looking to diversify their portfolios across different asset classes. Companies looking to raise capital could consider doing this through issuing Debentures.
- Typically provide higher rates of financial return than Government Bonds or bank interest rates.
- At the end of the lending period, issuing companies usually offer the choice of converting the Debentures into Shares. These are called Convertible Debentures and usually pay a lower interest rate to the lender (the investor).
- Interest is paid to investors whether or not the issuing company makes a profit.
- Are transferable (from investor to investor).
- The debt-equity ratio: The investor should consider the ratio in which debt is used to finance projects and capital compared to that used for Equity. If more debt is used to finance the company, the risk of default should be taken into account.
- Debentures are unsecured and only backed by the issuing company’s creditworthiness and reputation. The investor is lending money to a business and a Debenture carries all the risks that this involves.
How to get Debentures
To buy or sell Debentures, individuals will need to open a brokerage account with a JSE Equity Market member.