January 29, 2022

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Convertible Debenture Meaning and Key Explanations

Convertible Debenture Meaning and Key Explanations
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A convertible debenture is a debt capital with the option of being converted to equity capital at a specified date. This debt is an unsecured one with low-interest income to the holder.

Definition of Convertible Debenture

A convertible debenture is a type of debenture that provides the holder with an option to convert it to shares of the stock of the issuing company.

Key Explanations

It is an option an entity can choose from. If the company wants more equity fundings. But it is not in the position to do so right away. The company could use this debt capital now and allow holders to convert them to shares in the future.

There are many types of debentures. Generally, these are divided into secured and unsecured types. Convertible debentures fall within unsecured debentures. The issuing company is not required to provide collateral facilities.

Holders of this debt capital are issued lower interest income than other types of debt financing. This could be discouraging because it is expected that unsecured fundings should attract a higher interest rate. However, its advantage is the possibility of conversion by holders into shares of the issuing company. In addition, the value of the shares will be higher than the value of the debenture.

For example, if the conversion price is 15 Naira per share, the holder will only agree to such conversion if the price of the shares is higher than 15 Naira. This will enable the investors to have more value from their investment.

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Debenture holders for convertibles receive their portion of investment only after all other unsecured debt holders have collected theirs. This is a disadvantage to the holder because he or she may not receive the total principal amount if the assets available for distribution cannot cover them.

Conclusion

A convertible debenture is a debt capital that can be changed to equity capital. Although, unsecured or carries an interest rate lower than its counterparts. Also, they are paid their principal amount only after other debenture holders have received theirs. That is, in the event of liquidation.

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