Business
Debentures
Debentures are long-term debt instruments issued by companies to raise funds from the public. They are backed by the creditworthiness of the issuer and typically pay a fixed rate of interest. Debenture holders are creditors of the company and have a claim on its assets in the event of liquidation, making them a popular form of corporate borrowing.
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7 Key excerpts on "Debentures"
- Ellie (Larelle) Chapple, Alex Wong, Richard Baumfield, Richard Copp, Robert Cunningham, Akshaya Kamalnath, Katherine Watson, Paul Harpur(Authors)
- 2022(Publication Date)
- Wiley(Publisher)
Subsections 124(1)(b), (e) and (f) state: (1) A company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate, including the power to: (b) issue Debentures (despite any rule of law or equity to the contrary, this power includes a power to issue Debentures that are irredeemable, redeemable only if a contingency, however remote, occurs, or redeemable only at the end of a period, however long); (e) give security by charging uncalled capital; (f) grant a circulating security interest over the company’s property; Borrowing can come in many forms, and typically a company will have a mix tailored to its circumstances. • Bank finance is typically an overdraft facility or a loan secured against some asset of the company. • Trade finance is where the finance may be in the form of commercial bills or other facilities provided by the creditor of the company, particularly in the purchase of stock. • Private debt is where a significant member or a director may lend funds to the company. CHAPTER 10 Financing a company via equity or debt 261 These forms of debt are simply matters of private contract entered into between the company and the lender. However, as mentioned previously, where a public company intends to raise debt finance from public sources, this will be in the form of a debenture offering, and additional regulation of the process applies. The fundamental definition of a debenture is basically a document that confirms a debt between two parties (s 9 of the Corporations Act). However, the term ‘debenture’ when used in relation to public capital raising is used in a more restricted way. We will discuss Debentures in detail. 10.5 Debentures LEARNING OBJECTIVE 10.5 Describe the features of Debentures. Section 9 of the Corporations Act defines a debenture as follows.
eBook - ePub- Brian Pillans, Nicholas Bourne(Authors)
- 2012(Publication Date)
- Routledge-Cavendish(Publisher)
CHAPTER 18Debentures AND SECURITIES
A trading company has an implied power to borrow and to grant securities (called ‘charges’ in England) over any of its assets: see General Auction Co v Smith (1891). A company may, however, expressly provide within its memorandum or articles for powers to borrow and to grant securities. These express provisions may limit the company's powers, or the powers of those who act on the company's behalf, but may not allow the company to override provisions contained in the Companies Acts. Any express limitation imposed by the company's constitution is now subject to the provisions of ss 35 and 35A (see 5.10 ).18.1 Definition of Debentures
Usually, if a company wishes to raise loan capital it will issue Debentures. Debentures merely represent a creditor's interest in a company (as, in a similar way, shares represent a member's interest). Under s 744, the term ‘debenture’ includes ‘debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not’. A debenture was described in Levy v Abercorn's Slate and Slab Co (1887) as ‘a document which creates or acknowledges a debt’. In practice, the word ‘debenture’ is normally used to represent secured borrowing.18.2 Debentures compared with shares
Debentures and shares have certain similarities. They are both collectively termed securities. Dealings in Debentures on The Stock Exchange are carried out in much the same way as dealings in shares. Prospectus rules are applicable to both shares and Debentures in much the same way. There are certain distinctions between shares and Debentures, however.
eBook - PDF- Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
Characteristics The main purpose of bonds is to borrow for the long term when the amount of capital that is needed is too large for one lender to supply. When bonds are issued in $100, $1,000, or $10,000 denominations, a large amount of long-term indebtedness can be divided into many small investing units, which makes it possible for more than one lender to participate in the loan. A bond is created by a contract known as a bond indenture and represents a promise to pay both of the following: (1) a sum of money at a designated maturity date, and (2) periodic interest at a specified rate on the maturity amount (face value). Individual bonds are evi- denced or supported by a paper certificate and they typically have a $1,000 face value. Bond interest payments are usually made semi-annually, but the interest rate is generally expressed as an annual rate. Finance 5.2.3 An entire bond issue may be sold to an investment banker who acts as a selling agent and markets the bonds. In such arrangements, investment bankers may do one of two things. They may underwrite the entire issue by guaranteeing a certain sum to the corpo- ration, thus taking the risk of selling the bonds for whatever price the agent can get (which is known as firm commitment underwriting). They may instead sell the bond issue for a com- mission that will be deducted from the proceeds of the sale (which is known as best efforts underwriting). Alternatively, the issuing company may choose to place a bond issue pri- vately by selling the bonds directly to a large institution—which may or may not be a financial institution—without the aid of an underwriter. This situation is known as private placement. 1 “Long-term debt” and “long-term liabilities” meet the definition of a financial liability in the CPA Canada Handbook, Part II, Section 3856 and Part I, IAS 32 because they represent contractual obligations to deliver cash. These terms have the same meaning and are used interchangeably throughout the text.
eBook - PDFFinancial Accounting Theory and Analysis
Text and Cases
- Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
Classification of Long-Term Debt 343 stockholders only when the return on the project is greater than the cost of the borrowed funds. Earnings (less their related tax effect) in excess of interest payments will increase earnings per share. However, if the return on the investment project falls below the stipulated bond interest rate, earnings per share will decline. The assessment of a company’s use of financial leverage is discussed later in the chapter. Bond Classifications Bonds often are classified by the nature of the protection offered by the company. Bonds that are secured by a lien against specific assets of the corporation are known as mortgage bonds. In the event the corporation becomes bankrupt and is liquidated, the holders of mortgage bonds have first claim against the proceeds from the sale of the assets that secured their debt. If the proceeds from the sale of secured assets are not sufficient to repay the debt, mortgage bondholders become general creditors for the remainder of the unpaid debt. Debenture bonds are not secured by any property or assets, and their marketability is based on the corporation’s general credit. A long period of earnings and continued favorable predictions are necessary for a company to sell debenture bonds. Debenture bondholders become general creditors of the corporation in the event of liquidation. Bond Selling Prices Bonds are generally sold in $1,000 denominations and carry a stated amount of interest. The stated interest rate is printed on the bond indenture (contract). It determines the amount of interest that will be paid to the investor at the end of each interest period. The stated rate approxi- mates the rate that management believes necessary to sell the bonds, given the current state of the economy and the perceived risk associated with the bonds. A bond issued with a relatively low amount of perceived risk offers a lower interest rate than a bond issued with a relatively higher amount of risk.
eBook - PDFFinancial Accounting Theory and Analysis
Text and Cases
- Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
When using debt financing, it should be recognized that financial leverage increases the rate of return to common stockholders only when the return on the financed project is greater than the cost of the borrowed funds. Earnings (less their related tax effect) in excess of interest payments will increase earnings per share. However, if the return on the investment project falls below the stipulated bond interest rate, earnings per share will decline. The assessment of a company’s use of financial leverage is discussed later in the chapter. Bond Classifications Bonds often are classified by the nature of the protection offered by the company. Bonds that are secured by a lien against specific assets of the corporation are known as mortgage bonds. In the event the corporation becomes bankrupt and is liquidated, the holders of mortgage bonds have first claim against the proceeds from the sale of the assets that secured their debt. If the proceeds from the sale of secured assets are not sufficient to repay the debt, mortgage bondholders become general creditors for the remainder of the unpaid debt. Debenture bonds are not secured by any property or assets, and their marketability is based on the corporation’s general credit. A long period of earnings and continued favorable predictions are necessary for a company to sell debenture bonds. Debenture bondholders become general creditors of the corporation in the event of liquidation. Bond Selling Prices Bonds are generally sold in $1000 denominations and carry a stated amount of interest. The stated interest rate is printed on the bond indenture (contract). It determines the amount of interest that will be paid to the investor at the end of each interest period. The stated rate approximates the rate that management believes necessary to sell the bonds, given the current state of the economy and the perceived risk associated with the bonds.
eBook - PDF- Laurence Booth, Ian Rakita(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
Further, the term loan can often be structured to fit with a firm’s operating and revolving LCs. For example, sometimes a revolver is structured to switch into a term loan at the end of its five-year life. Concept Review Questions 1. Briefly describe operating LCs, revolving LCs, and term loans. 2. Why do banks typically impose debt covenants on their borrowing customers? 3. Why is it reasonable to assume that most firms will have a banking relationship? 18.4 Long-Term Debt and the Money Market LEARNING OBJECTIVE 18.4 Identify the requirements that must typically be satisfied for public debt issues. Long-term financing generally refers to any debt issued with a term longer than one year. It is often called “funded” debt. This is because short-term debt is not regarded as permanent capital; therefore, when a firm accumulates “too much” short-term debt, it “funds” this debt by issuing long-term debt. As discussed in the previous section, banks provide medium-term financing through term loans, which are also provided by insurance companies and other specialized financial companies. These are examples of private financing, because the debt is not offered to the general public. For bank financing, the firm generally does not have to pro- vide any extra information, because it already provides information in support of its existing bank relationship. For term loans from other entities, the firm will have to provide an offering memorandum. As described in Chapter 17, this document contains much the same type of information as a prospectus does, but in less detail. The remaining forms of financing involve public financing, and here it is important to realize that securities legislation, with the requirement that a prospectus be filed, applies to debt as well as equity offerings. As discussed in Chapter 17, most financing in the capital markets is done by reporting issuers, who can raise capital, both debt and equity, through the issue of a short-form prospectus.
eBook - PDF- R. Stafford Johnson(Author)
- 2013(Publication Date)
- Bloomberg Press(Publisher)
For investors, it is important to distinguish between strong companies that sell Debentures and have no bonds secured with pledged assets and companies that sell Debentures and have bond secured with pledged assets—the latter needs closer scrutiny. Debentures can be issued with a number of protective covenants. For example, the indenture might include a restriction on additional debt that can be incurred or specifications that new debt can be incurred only if earnings grow at a certain level or if certain financial ratios are met. The Kraft bond described in Exhibit 7.3 is an example of unsecured bond with a number of protective covenants. Debentures can also be classified as either subordinate or unsubordinate. In the case of liquidation, subordinated debt (junior security) has a claim only after an unsubordinated claim (senior claim) has been met. Accordingly, a debenture can be made subordinate to other claims such as bank loans or accounts payable. Subordination may be the result of the terms agreed to by the firm in its other debt obligations. For example, a bank might require that all future debts of a company be made subordinate to its loans. Since subordinated debenture bondholders are last in line among creditors if the issuer defaults, they are sometimes sold with a sweetener or inducement such as an option to convert to shares of the company’s stock or a put option giving the holders the right to sell the bond back to the issuer at a specific price (see Exhibit 7.6). Guaranteed Bonds Bonds issued by one company and guaranteed by another economic entity are defined as guaranteed bonds. The guarantee ensures that the bondholders will be paid interest and principal in the event the issuer defaults. With the guarantee, the default risk of the bond shifts from the borrower to the financial capacity of the insurer.
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