What Are Debentures? Defining Debenture Terms and Other Need to Know Info

What is a Company Debenture?

‘Debenture’ is a term used to describe a written agreement between a lender and a borrower. This written agreement will outline any fixed or floating charges on a loan, as well as the terms and conditions.

This agreement is then filed at Companies House for safe keeping and assures no other finance can be secured against the assets detailed.

Fixed charge – in property investment, this refers to the mortgage on a property which is the security for a loan. The assets (property in this case) cannot be disposed of (sold) without the permission of the lender.

Floating charge – security on an asset that can change in value or quantity. For example, cash, stock or fixtures and fittings. Businesses do not have to ask the lender’s permission for dealing with these, assuming the borrower does not default on loan repayments.

Why Take Out a Debenture?

Depending on the size of your company, you’re likely to have multiple layers of debt, and company debentures help you to prioritise these loans.

Corporate debentures can protect business owners and will allow you to obtain priority of repayment of your director’s loan account should your company be wound up. For example, if you put your own money into the business and it later goes into insolvency. If a debenture is in place, your loan will be repaid before any debt from unsecured creditors.

Unsurprisingly, this debenture loan protection is popular among borrowers, but not finance lenders. The repayment order would be as follows:

1. Secured creditors – legal mortgage, legal charge or fixed charge

2. Preferential creditors – wage and holiday payments to staff

3. Unsecured creditors – debentures and any other debt such as VAT, PAYE, corporation tax etc.

What Else Do I Need to Know About Corporate Debentures?

What is a Subordinated Debenture?

A subordinated debenture, also known as ‘junior security’ does the opposite. Rather than prioritising the repayment of a debenture loan, it dictates that it is a lower priority and this unsecured loan with no collateral should be paid after any other bonds or debts.

This kind of unsecured loan is usually offered by those who are risk-orientated and seek high yields in return. This is because a subordinated debenture loan is only paid back if there are funds left over from paying unsubordinated debentures, and therefore may only be partially paid… if at all.

What is a Negative Pledge?

You may find a negative pledge clause in a debenture bond indenture. This is a negative covenant which ensures the issuer will not use any assets as security for the payment of other debts or liabilities if this would impact the level of risk on the bond in question.

A negative pledge is usually utilised to protect bondholders and to secure a lower coupon rate.

What Does Non-Crystallisation Mean?

When a floating charge is converted into a fixed charge, this is known as crystallisation. If a business or asset with a crystallised loan is then purchased, the debt comes attached.

Therefore, a letter of non-crystallisation is issued when a business or asset subject to floating charge is being bought, or a lender is taking out a second floating charge, to confirm there has been no crystallisation and to provide consent.

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