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What are Secured Debentures?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 28 October 2016
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Secured debentures are long-term investment vehicles similar to bonds where companies essentially borrow capital from investors. The company that is the issuer of the debenture usually agrees to pay back the investor interest until the completion of the debenture agreement, at which point the principal is also repaid. One main advantage of secured debentures over other types of debentures is that they allow the investor a bit more protection. Should the issuer default on the repayment, the debenture holder can make a claim on the assets of the issuer until repayment is complete.

Long-term investors with great amounts of capital often look to gain equity in companies on the strength of their investments. The problem with equity is that the investor will get no return on his capital and could even lose a significant amount should the company struggle or go under. For that reason, investors may wish to invest in debt as a safer way to see a return. Secured debentures allow investors to be involved in business investment with some degree of safety.

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It is important to distinguish secured debentures from other unsecured types of debentures. In an average debenture, the debt holder has no real recompense should the issuer of the debenture default on its agreement to pay back the loan. The debenture holder would have to get in line with all other common debt holders in an attempt to regain the capital hat has been loaned. This is a lengthy process that may never actually come to fruition for the investor.

On the other hand, secured debentures act in much the same way as mortgages. Whereas in a mortgage the mortgage holder may take possession of a home if the buyer doesn't repay the mortgage loan, the holder of a secured debenture may claim possession of the assets of the company that issued the debenture. This makes it much more likely that the debenture holder will get all of his money back along with the interest owed on the loan.

It is important to note that the laws surrounding secured debentures require that the lenders be provided with detailed information regarding the company issuing them, such as the company's bond rating. Debentures generally have a duration of anywhere between one to ten years, with the lender receiving regular interest payments from the issuer up until the agreement expires. At that point, the issuer of the debenture is required to pay back the original principal amount to the investor.

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