Secured Debentures

A debenture is essentially a loan agreement – but they come in many forms and can mean different things in different markets. A secured debenture means bonds that are issued with collateral. When any particular or specified property of the company is offered as security to the debenture-holders and when the company can deal with it only subject to the prior right of the deben­ture-holders, a fixed charge is said to have been created. The party issuing the bond offers a piece of property or other assets to states and bondholders along with signed permission for those entities to take possession of the collateral if the issuer doesn’t repay the debt. When the issuer company fails on payment of either the principal or interest amount, the assets of the company can be sold to repay the liability to the investors.

Secured debentures are debentures secured by a charge on the fixed assets of the issuer company. For instance, mortgage debentures secured on the land of the company.

Secured debentures have less risk associated with them than unsecured ones. The secured debenture agreement itself defines the terms and conditions of a loan. For example, specifying the amount, the interest rate, the repayment schedule, and the secured assets. On the other hand, when the debenture-holders have a charge on the undertaking of the company i.e., on the whole of the property of the company, both present, and future, and when it can deal with the property in the ordinary course of business until the charge crystallizes i.e., when the company goes into liquidation or when a receiver is appointed, the charge is said to be a floating charge. As an example, a city might use future property tax receipts to secure a bond while companies might use their factories as bond securities. A factory or office building is a typical example of a fixed charge asset in a secured debenture.

Secured debentures are linked to assets, either with a fixed charge or a floating charge. When the floating charge crystallizes, the debenture-holders have a right to be paid out of the sale proceeds of the assets subject to the right of the preferential creditor but prior to making any payment to unsecured creditors. This results in lower coupon rates and cuts the borrowing costs for the issuers. It is a bond that is guaranteed with a pledge of assets. A bond might be secured with real estate.

 

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