Debentures and bonds are instruments used by companies and governments to get financing beyond their normal cash flows. They are particularly common in real estate, where companies looking to finance individual development projects, for example, turn to investors for funding by issuing bonds or debentures.

We take a look at the differences and similarities between debentures and bonds, and explore what makes debentures a good investment option for sophisticated investors looking for investment opportunities that offer fixed-income, over a fixed term.

What is a Debenture and How does it Differ from Traditional Bonds?

Derived from the Latin word meaning “there are owning”, debentures are financial instruments of debt companies use to borrow money from the public in order to raise capital, often for short-term projects like property development. Issued with a fixed rate of interest attached, debentures are an acknowledgement that a company has borrowed an amount of money from an investor, which it promises to repay at a future date.

Presented as a legal certificate, debentures state the principal amount an investor has invested, the interest to be paid, and the schedule of payments (monthly, bi-annually, or annually, for example). At the end of the investment period, the investor would have received their full principal amount as well as the interest promised.

Similarly, bonds are also debt financial instruments, usually issued by corporations, financial institutions and government agencies to raise capital, and are backed by assets or collateral. This asset-backed security is the key difference between debentures and bonds, and where debentures are medium- to long-term investments, bonds are long-term investments with a generally higher tenure than debentures. Technically speaking, all debentures can be classified as bonds, but not all bonds are debentures.

Secured and Unsecured Debentures

A secured debenture involves the borrower’s assets being leveraged by the lender for security. If the borrower defaults on repayments, the assets can be sold as collateral to cover the debt owed to the lender. This type of debenture is very similar to bonds in this sense. An unsecured debenture, on the other hand, does not have assets or collateral attached to it, and these types of loans are purchased solely on the basis of the issuing company’s credibility, reputation and historical performance. In other words, it’s up to the discretion of the lender to decide whether to take out a debenture with the borrower (issuing company), based on the borrower’s credibility.

What are some of the Benefits of Debentures?

Debentures offer investors several benefits over and above the fixed rate of interest that is guaranteed with the purchasing of a debenture. First off, investors are guaranteed the fixed interest rate that is promised to them at the end of the investment period, regardless of the issuing company’s performance.

Because debentures secure all present and future loan advances regardless of the issuing company’s financial performance, they are a popular investment option for lenders, but carry a fair amount of risk for borrowers. Even in cases of liquidation, the sale value of mortgaged assets are first used to redeem debentures, even before shareholders are paid out.

In line with this, default payments have adverse effects on the creditworthiness of the issuing company, which can affect investors’ willingness to purchase debentures with the company. As such, debenture investment repayments are a priority to issuing companies so as to maintain their creditworthiness and reputation.

Do Debentures have any Disadvantages?

Conversely, debentures can be a risk to investors who don’t do the necessary due diligence to ensure that the company issuing the debenture is reputable and credible.

Although debenture holders get pay out preference over shareholders, another disadvantage debentures pose is debenture holders have no voting rights when it comes to how an investment is managed. This may not necessarily affect the debenture directly, nor the earnings of the debenture holder, but control over the investment’s management lies entirely with the issuing company, and debenture holders have no influence over decisions pertaining to their investment.

Investing with One Crown Investments: Getting Ahead with Debentures

With the help of a specialist investment broker, investors can capitalise on debentures by carefully considering and selecting the right debenture investment for their unique investment goals.

As an alternative investment broker firm, we at One Crown Investments specialise in private debt funding for micro and SME businesses in the UK property market, through loan notes like debentures. Our fixed income investment portfolio is developed with our clients in mind, as we strive to deliver exceptional high return fixed investment opportunities that, in turn, grow our clients’ portfolios.

We also understand the importance of managing risk effectively, and as such, we have invested in people, processes and following strict protocols before making an investment available to our clients. This strong focus on risk management positions us as a champion of our clients’ interests, and ensures only the most scrutinised of investments are selected for our portfolio.

Summary

Debenture investments can be an excellent option for private investors looking to diversify their portfolios and add to their income streams. And because debentures have a fixed maturity date, you know with certainty when your principal investment amount will be repaid, as well as how much interest you will earn, and how often.

If you would like to invest in a debenture-based project, or learn more about available debenture investment opportunities, contact the One Crown Investments team of property investment experts and get access to our highly scrutinised investment portfolio.