Debentures are often viewed as a mixture of having a shareholding and a fixed interest loan.
They usually rank higher than shares in terms of the order they receive their distribution, but below fixed interest loans.
Debenture holders are normally entitled to a return equivalent to a fixed percentage of their initial investment and this is usually an annual payment.
The specifics of each arrangement would determine the individual features applicable to a particular debenture. One attribute which might exist could provide holders with an accumulation option whereby, the amounts owing are built up and paid at a later date should the company fall short of cash in a particular year.
Debentures might be secured on the assets of a company either through a fixed charge (paired with a specific asset) or a floating guarantee over the general assets of the business.
The security inherent in debentures makes them a “safer” investment than shares. Should the company perform very well, the amounts attributable to holders of debentures would not increase in line with any gains, they would only be entitled to their previously agreed return.
On some occasions, an option might exist to convert fixed return debentures in to shares at a pre-arranged conversion rate. The term given to such an arrangement is convertible debentures.
