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Home » Finance » Sources of Finance » Non-Ownership Capital

Non-Ownership Capital

Debentures are loans that are usually secured and are said to have either fixed or floating charges with them.

A secured debenture is one that is specifically tied to the financing of a particular asset such as a building or a machine. Then, just like a mortgage for a private house, the debenture holder has a legal interest in that asset and the company cannot dispose of it unless the debenture holder agrees. If the debenture is for land and/or buildings it can be called a mortgage debenture.

Debenture holders have the right to receive their interest payments before any dividend is payable to shareholders and, most importantly, even if a company makes a loss, it still has to pay its interest charges.

If the business fails, the debenture holders will be preferential creditors and will be entitled to the repayment of some or all of their money before the shareholders receive anything.

A debenture with a fixed charge has a fixed rate of interest and might be presented as:

'10% Debenture 2005/2008 1,000,000'

In this case, the debenture is redeemable (will be paid back) between 2005 and 2008 and the fixed interest rate is 10%.

Debentures may be issued in units of 100 or 1 - if it is in 1 units then it will be called debenture stock.

A debenture issued with a floating charge means that the interest rate is not fixed and such debentures are usually not tied to any specific asset such as land or buildings.

You may have heard the term 'debenture holders' in relation to the financing of sports stadia. Part of the funds raised for stadium developments like those at Wembley, Arsenal, the rugby stadium at Twickenham and the cricket stadium at Trent Bridge in Nottingham are financed by debentures. The debenture holders usually also receive access to boxes at the stadium for their use throughout the period of the 'loan'.

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