In law, a debenture is a document that either creates a debt or acknowledges it. The term is used in corporate finance for a medium to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note.
Debentures are generally freely transferable by the debenture holder. Debenture holders have no voting rights and the interest paid to them is a charge against profit in the company's financial statements.
In the United States, debenture refers specifically to an unsecured corporate bond;[1] i.e., a bond that does not have a certain line of income or piece of property or equipment to guarantee repayment of principal upon the bond's maturity. Where security is provided for loan stocks or bonds in the US, they are termed 'mortgage bonds'.
However, in the United Kingdom a debenture is usually secured.[2] In Asia, if repayment is secured by a charge over land, the loan document is called a mortgage; where repayment is secured by a charge against other assets of the company, the document is called a debenture; and where no security is involved, the document is called a note or 'unsecured deposit note'.[3]
A US corporation receives an advantage when it issues debentures (as opposed to issuing secured corporate bonds) because it means that the company does not have to set aside certain assets or income to guarantee against its default in paying back the principal at maturity. Therefore, a corporation that issues debentures may use for other financing activities those assets or funds that would otherwise be held in a separate account.
Types
There are two types of debentures:
- Convertible debentures, which are convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. "Convertibility" is a feature that corporations may add to the bonds they issue to make them more attractive to buyers. In other words, it is a special feature that a corporate bond may carry. As a result of the advantage a buyer gets from the ability to convert, convertible bonds typically have lower interest rates than non-convertible corporate bonds.
- Non-convertible debentures, which are simply regular debentures, cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature attached to them. As a result, they usually carry higher interest rates than their convertible counterparts.
[edit] Usage in sports
A large number of sporting organisations have used the issuing of debentures to allow their fans to gain a financial stake in the club, and to foster a sense of community. The organisers of the Wimbledon Tennis Championships, The All England Club, issue their debenture holders a ticket for each day of the tournament. Furthermore, only debenture holders are permitted to sell their tickets to third parties.
In 2007 a group of debenture holders in the All England Club created the first website allowing debenture holders to sell tickets directly to members of the public. Formerly, most tickets sold to the general public were sold by ticket touts, who had purchased them from debenture holders for considerably less. The new website allows debenture holders to sell their own tickets without paying a middle man, thus making the tickets themselves considerably cheaper for consumers.[4]
Other sports organisations which issue debentures in a similar fashion include:
- Arsenal Football Club
- Hampden Park
- Wembley Stadium
- The Millennium Stadium
- Twickenham Stadium
- Nottinghamshire County Cricket Club
- Donington Park
Not all sporting debentures provide an entitlement to free tickets. Some organisations, such as the Millenium Stadium, merely give holders the right to purchase a ticket for events.
[edit] References
- ^ Glossary: D on FINRA website, United States
- ^ What is a debenture?, Company Law Club, referring to United Kingdom usage
- ^ Chandra Gopalan (2007); Company Law in Singapore 3rd Edition; McGraw-Hill Education (Asia)
- ^ http://www.wimbledondebentureholders.com/
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