Wednesday, July 18, 2018

Debenture

Term Definition
Debenture

An instrument that evidences the issuer's borrowing from the lender to whom the company issues a debenture. A sort of promissory note issued under a trust indenture to multiple investors whose debentures are entitled to be treated equally and on parity with all of the other debentures sold pursuant to the trust indenture.  There is also a provision in a trust indenture that provides for a trustee whose duty it is to act on behalf of the debenture holders in the event of a non-payment or other default under the debentures.  The holder of a debenture is entitled to receive a series of future payments from the company that issued the debenture. The debentures would contain applicable provisions if a debenture is convertible into common stock, subordinated in relation to some or all other past or future indebtedness of the issuing company, or senior to any such other indebtedness,  Debentures usually have a repayment term at least 10 years.  Debentures are usually issued by companies whose growth prospects are good and whose good cash flow also lessens the risk of a default.  The company provides a conversion right as a means of raising more money from debt investors and possibly marginally improving from the debtor's perspective the other terms of the debt.  The addition of a conversion right draws or is intended to draw interest from investors who foremost seek a fixed-income interest payment, called the "coupon", and also wish to pair that income with a potential equity upside, possible because any amount of debenture principal  (and sometimes interest) can be converted into common stock at the holder's sole choice. See also Note.