Classification of debenture finance, Finance Basics

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Classification of Debenture Finance

i) Secured Debentures

These are those types of debentures which a company will secure generally in two ways, secured along with a fixed charge or along with a floating charge.

a) Fixed Charge - a debenture is secured with a fixed charge whether it can claim on a particular asset.

b) Floating charge - whether it can claim from any or all of the assets that have not been pledged as securities for any other form of debt.

ii) Naked Debentures

These are not secured via any of the company's assets and as such they are common creditors.

iii) Redeemable Debentures

These are the category of debentures, that the company can buy back after the minimum redemption period and before the maximum redemption period usually 15 years after that holders can force the company to redeem to receivership their capital and interest outstanding.

iv) Irredeemable Debentures as perpetuities

These are never bought back whether case they form permanent source of finance for the company. Although, these are rare and are usually sold via company's along with a history of stable ordinary dividend record.

v) Classification according to convertibility

Convertible debentures - Can be converted into ordinary shares although they can also be converted into preference shares.

Conversion price = par value of a debenture/No. of shares to be received.

Conversion ratio  =  Par value of debenture / Par value of ordinary shares

vi) Non-convertible debentures

These cannot be changed into ordinary preference shares and they are generally redeemable.

vii) Sub-ordinate debentures

Generally last for as long as 10 years and they are sold via financially strong companies.  That are not safe and they rank among general creditors in claiming on assets throughout liquidation.  This means such they are sub-ordinate to senior debt although superior to ordinary and preference share capital.


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