What Are Secured Debentures
Secured debentures refer to corporate bonds that have been secured by line of income such as property or other assets. This gives a guarantee as to the repayment of the principal and the interest rates once the bond matures. In the United States the secured bonds are often referred to as mortgage bonds. In Canada a secured loan bond has security given to the debtor with no specific assets that have been pledged. In those countries where there are specific assets that have been pledged they are the first to go once the company or the creditor is put into insolvency. Secured bonds ensure that the creditor gets a bigger portion if the debtor falls in to liquidation which is makes these bonds a favorite to some creditors.
In other countries security is guaranteed by charge of land or other immovable assets, this applies to Asian countries and such loan documents are referred to as mortgage. However should the security be over any other assets the document is known as a debenture while unsecured bonds are referred to as deposit note. Other states and nations such as in the UK have stringent terms about the debentures offered in their countries are strictly secure. Secure bonds come with security features that give assurance to the person holding the certificates on the repayment deadline both the principal and interest will be fully paid. One of the big disadvantages with the secure bonds is that because the creditors is assured of repayment by the collateral put up by the debtor the interest rates are often lower unlike the unsecured bonds.
On the other hand unsecured debentures that is not secured by assets such as property , equipment or any line of income which will have no guarantee for repayment principal once the bond has matured. This makes the bonds more risky unlike the secured debentures; usually unsecured debentures can be likened to unsecured loans which have little or no collateral. This means that once the repayment time is due there is no guarantee about the debt owed being cleared. Some countries refer to this kind of bonds as unsecured deposit note. Unsecured bonds therefore gives the issuing company less obligation should losses be incurred and liquidation or bankruptcy follows as results of debts.
Should the debtor be declared bankrupt the creditor who was issued with the bonds will have general claim on the assets that the borrower has. However these may be only after specific assets that have been assigned to a secured debenture, therefore the creditors with unsecured notes will eventually realize a smaller portion of the claims which will not be comparable to secured debts. In some countries unsecured creditors with debts to the debtor who have been declared insolvent are required to set off the debts. This means that at times unsecured creditors with mature bonds liable to the debtor have preferential position, however because this only applies to certain states it’s wise to find out about the type of conditions that applies to that particular country or state.