Private Debentures
They are securities of fixed interests that are issued for long terms with an amortization period of five or more years. Non-financial private companies issue them although on certain occasion’s banks, saving banks and government institutions will also issue them.
The objective they go after with the emission for the market of these securities is to attract great amounts of capital sums at a less cost that if using other financial sources as is to go to banking institutions to ask for a loan, for example.
The difference between public debts is that the profits that are obtained by the private debentures are usually superior. The basic motives are:
- To counteract the risk of insolvency that takes place in the case of the private sector.
- To counteract the less liquidity, due to that they have a less amount. We can denominate the private debentures in two different types:
- Simple or ordinary debentures: They only count with the general guarantee of their company assts.
- Guaranteed debentures: in addition to the general solvency of the issuer they have an additional security for the refunding of the securities. They offer a mortgage guarantee or an endorsed guarantee (from a banking or governmental institutions, etc.)
In general the debentures admitted for negotiation at the different stock exchange markets are of the first group.
Classical debentures
- They are fixed interest non convertible securities. They are the most conventional securities and of a usual emission at the different world stock exchange markets within the group of private debentures. Or well they pay fixed interests until its maturity, or the mechanism to determine the amount of each coupon is prefixed.
- The coupon is the certificate that accompanies the security and whose presentation gives you the right to receive the accrued interests on the established dates for it.
Convertible debentures
This type of debentures has the rights to be exchanged for a determined number of shares from the issuer, in terms and conditions fixed beforehand. Companies use the emission of convertible debentures as an alternative to increase their capital.
In some countries the execution is immediately, due that issued convertibles usually offer its first option for conversion in between the two and six months from its subscription. As for most of the international markets this option doesn’t begin, as a general rule, after six years from its emission.
The debenture holder will exercise the option of conversion:
- If he considers that the price at which he obtains the shares are inferior to that of his expectancy as stock quoting.
- When the price of conversion is inferior to that of the market.
- For this motive, the emission of convertible debentures are usually increased in a rising stock exchange market, with expectations of rising quotations, due that under this conditions, the debenture holders exercise their right of conversion and gives sense to these type of securities.
The rate of conversion (number of shares that can be obtained for each one of the debentures) depends, generally, of the quotations of the shares during a certain period before the date of conversion, applying to them a discount.
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