Debentures are medium to long-term fixed-income securities issued by companies in order to finance their projects. While only financial institutions may issue CDBs, LCIs, among others, the debentures are issued by non-financial institutions that are registered with the Brazilian Securities Commission (CVM). The issuance process is usually coordinated and structured by an investment bank or other financial institutions.
Imagine a company wants to open a new line of business. For that, it needs available funds. It can arrange these funds through equity, bank loan, stock issue or debenture issue.
The company's objective is to make this line of business created through the funds raised by the issuance of debentures profitable, so as to pay the principal and the interest of those who buy these papers.
The redemption of a debenture can be made on the due date or in advance. In the latter case, the debenture holder must trade it on the secondary market.
The interest payment can be semiannual or annual, depending on the trading conditions. The maturity of these assets is at least two years, and may reach more than ten years.
One way to invest in debentures is through an investment bank or financial institution that structures and trades these assets, generally available to both institutional and retail investors.
Classification of debentures
There are some ways to classify debentures. Let us clarify these classifications below.
- As far as convertibility is concerned
Convertible debentures: can be exchanged for shares of the issuing company. This type of debenture presents less risk than other debentures, because if the company does not have cash to pay its commitments accumulated with debentures, the creditor may become a shareholder of the company.
Exchangeable debentures: can also be exchanged for shares. The difference is that in the case of exchangeable shares, the shares may not belong to the company issuing the debentures itself.
Simple or non-convertible debentures: cannot be exchanged for shares. Therefore, the risk of these papers is greater.
- As for the incentive
Debentures encouraged: receive income tax exemption. These debentures may be issued only by companies in the infrastructure sector. The government gives this type of incentive so that projects aimed at expanding the country's infrastructure network are more viable.
Common Debentures: do not receive income tax exemption. The incidence of Income Tax is regressive, that is, the longer you keep the paper, the less tax is charged. For example, if you stay up to six months with the paper, the tax on your profitability will be 22.5%, already if you stay more than two years with it, the tax on your profitability will be 15%.
- As for income
The most common forms of income from debentures are as follows:
Debenture prefixed: the investor receives a defined interest rate at the time of purchase of the paper.
Post-fixed DebentureThe paper yield follows a pre-established indicator, such as SELIC or CDI. In this case, there is no way of knowing beforehand what the effective yield will be, as it will follow the variations of the indicator.
Hybrid DebentureIn this case, there is a prefixed and a post-fixed component. Generally, the fixed component is a specific interest rate (7%, for example), while the post-fixed component is an indicator of inflation, such as IPCA or IGP-M.
- As for the guarantee
There are four types of debenture guarantees to make your risks smaller. These are them:
Actual warrantywhen there are assets (whether of the company itself or of a third party) that are given as security through pledge, guarantee, mortgage or anti-chresis. As long as the securities are not redeemed, the assets given as collateral cannot be traded.
Floating warrantyThere are no specific assets given as collateral. The guarantee are unspecified company assets. In case of bankruptcy, debenture holders have preference in the list of creditors.
Unsecured guaranteeIn this case, the debenture holder has no preference in the list of creditors in case of bankruptcy. In other words, there is no specific guarantee.
Subordinate guaranteeHere, the investor has preference only over the shareholders of the company.
The main advantage of debentures is that their return is usually higher than other fixed income papers because their risk is higher, since they are issued by private companies that usually want to expand their business (open a new factory, develop a new product, etc.).
One disadvantage of debentures is that for you to redeem these papers in advance, you must trade them in the secondary market. It is often difficult to find buyers of debentures in this market, which can make your liquidity very restricted.
Another disadvantage is that the risk is higher in relation to other fixed income papers. This is because debentures are not covered by the FGC (Credit Guarantee Fund, which guarantees the recovery of deposits and credits in financial institutions). Therefore, it is necessary to investigate whether the company is solid, whether it can afford its commitments.
Companies can use certain guarantees to give their debentures credibility and reduce their risks. For example, a transmission company may use consumer receipts as collateral to show that it is able to honor its commitments.
Difference between debentures and shares
Debentures and shares are quite different assets. Although both are issued by companies, the debenture is a company debt that has defined term and interest, while the share is a part of the company's capital, and both its profitability and term of application are not defined. Therefore, whoever invests in stock becomes a partner of the company, while whoever invests in debenture becomes its creditor.
Conclusion
For those looking to diversify their portfolio, debentures are a great option. If you are familiar with the company's case and know it will honor its commitments, buying some of its debentures can be a smart choice. Since these assets carry greater risk, it is not recommended that you invest all your money in them.
You must choose the debentures that are most compatible with your profile. You must pay attention to the redemption period, the risk and the return on the asset. Once this is done, the chances of you making the wrong investment are very small.
