Convertible Debentures

Bonds vs. Debentures: The Most Notable Differences

In finance, the following are more or less the same thing:

• A convertible bond
• Convertible note
• Convertible debt
• And convertible debenture

The most notable difference between bond and debenture is that debenture has a much longer maturity (greater than ten years or so). So, in a sense, all debentures are bonds, but not all bonds are debentures. Unsecured bonds are basically debentures. But in some countries, people use the two terms interchangeably.

Debentures

Here’s a breakdown of debentures:

• Debentures generally have more specific purposes than other bonds.
• Both bonds and debentures help raise capital. But debentures typically are more useful when raising money to meet the expenses of an upcoming project. Or for when you want to pay for a planned business expansion.
• These debt securities are a common form of long-term corporate financing.
• Debentures carry either a floating or a fixed-interest coupon rate return to investors. And they come with a repayable date.

Bonds

Now that we understand debentures fully, let’s look at a breakdown of bonds:

• The bond is the most common debt instrument private corporations and governments use.
• They serve as an IOU between the public company that issues them and the investors. An investor provides your business with a loan in return for the promise of repayment at the specified maturity date. Usually, the investor receives periodic interest payments over the bond’s term.
• Bonds are generally a relatively safe investment when it comes to business funding. That is if unspectacular investments with a guaranteed rate of return.
• Additionally, financial advisors are known to encourage their clients to keep a percentage of their assets in bonds. And then increase that percentage as they approach retirement age for max benefits.

At XCell Fund, our experts can help you decide what will benefit your business the most.

Why Do Companies Issue Convertible Bonds?

Publicly traded companies issue convertible bonds or debentures for two primary reasons:

• To lower the coupon rate on debt. This enables your company to save on interest expenses, which can be enormous in the case of a significant bond issue. And because of its conversion feature, investors are good with accepting a lower coupon rate on a convertible bond.
• To delay dilution. Dilution can drastically impact the value of your portfolio. So, companies delay dilution to make adjustments to their earnings for valuation when dilution occurs. Raising capital by issuing convertible bonds (rather than equity) is one way to postpone dilution to the equity holders.

Benefits and Disadvantages of Convertible Bonds

The benefits of convertible bonds and debentures are many. They offer the best chance of success to small-cap startups. Five of the most incredible advantages are as follows:

• Issuing convertible bonds can help companies minimize negative investor sentiment surrounding equity issuance.
• Bondholders can easily convert them into equity shares when the company performs well.
• A convertible bond protects investors’ principal on the downside. But it also allows them to participate in the upside should your company succeed. So, issuing convertible bonds can also help provide investors with some security in the event of default.
• Investors can enjoy the value-added component built into convertible bonds. They’re essentially a bond with a stock option, particularly a call option.
• Companies benefit since they can issue debt at lower interest rates than traditional bond offerings.

As a startup, if you have a project in mind that requires a lot of capital, resulting in a loss in the near-term revenues, convertibles can be your saviors. If the project leads your company to profitability later, convertible bond investors can get back some of their principal upon the company’s short-term failure. Additionally, the investors can benefit from capital appreciation. That is when they convert the bonds into equity if the company is successful.