A subordinate debenture is a form of bond that a company utilises to obtain funds. It is referred to as “subordinate” because it is repaid after other debts have been settled. Consequently, in the event of the company’s bankruptcy, holders of subordinate debentures will receive payment last. These debentures lack collateral and are therefore considered riskier than other bond types. They are occasionally referred to as “unsecured bonds” or “naked debentures”.
A subordinate debenture is a form of debt instrument that holds a lower priority compared to other types of debt. Unlike other debentures, it is not backed by a lien on corporate assets but solely relies on the general credit and financial reputation of the corporate issuer. In case of bankruptcy or default, ordinary debentures would be given priority over subordinate debentures for repayment. On the other hand, convertible debentures can be converted into different securities, such as stock. A convertible subordinated debenture is a debenture that is subordinate to another debt but can be converted into a different security. Sinking-fund debentures, on the other hand, are secured by periodic payments into a fund specifically established to retire long-term debt. This type of debenture ensures that the company has sufficient funds to repay its debt when it becomes due. In English law, a company’s security for a monetary loan is also referred to as a debenture, usually creating a charge on company stock or property. Overall, subordinate debentures are a type of debt instrument that holds a lower priority compared to other types of debt. While they allow companies to raise funds, investors should be aware that they may not be given priority for repayment in the event of bankruptcy or default.
A subordinate debenture is a type of debt instrument that ranks lower in priority compared to other debts or obligations of the issuer. In the event of bankruptcy or liquidation, holders of subordinate debentures will be paid after senior debtholders and other creditors.
A senior debenture holds a higher priority in terms of repayment compared to a subordinate debenture. In case of default or bankruptcy, senior debtholders will be paid first before subordinate debtholders.
Investing in subordinate debentures carries a higher level of risk compared to senior debentures. In the event of financial distress or bankruptcy, there may not be sufficient assets to fully repay subordinate debtholders, resulting in potential losses.
Yes, it is possible for a subordinate debenture to be convertible into equity. This conversion feature allows debtholders to exchange their debentures for a predetermined number of shares of the issuer’s common stock.
Subordinate debentures are typically unsecured, meaning they are not backed by specific collateral. This lack of security increases the risk for debtholders, as they have no specific assets to claim in case of default.
Yes, a company can issue both senior and subordinate debentures simultaneously. This allows the company to raise capital from different investor groups, each with varying risk appetites.
Interest payments on subordinate debentures are typically calculated based on a fixed rate or a variable rate tied to a benchmark, such as the prime rate. The specific terms and conditions of the debenture will outline the interest calculation method.
Yes, a company may have the option to redeem subordinate debentures before their stated maturity date. This can be done through a call provision, which allows the issuer to repurchase the debentures at a predetermined price.
If a company defaults on its subordinate debentures, it may result in legal action by debtholders to recover their investment. However, as subordinate debtholders have a lower priority in repayment, they may receive less or nothing in case of default.
Subordinate debentures are generally considered more suitable for investors with a higher risk tolerance. Conservative investors seeking lower-risk investments may prefer senior debentures or other fixed-income securities with higher priority in repayment.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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