What is Fixed Debenture
A fixed debenture, also known as a fixed charge debenture, is a debt that issued against specific assets, with a fixed rate of interest for repayment. These financial instruments are generally used by companies to raise money to finance operations in the short term.
To secure the loan, companies sign over specific assets like real estate or equipment to the creditor. This collateral is necessary because the credit does not have any other form of backing.
BREAKING DOWN Fixed Debenture
Fixed debentures allow the creditor to place restrictions on the mortgaged assets which back the loan. For example, a development company may sign over one of its apartment buildings as backing for a loan. The creditor may then restrict the company from selling that property, or even leasing units within it, for the duration of the note. The creditor may create these restrictions to prevent the borrower company from making risky or poor financial decisions.
Once the loan is satisfied, the borrower regains full control of their assets. In the meantime, the borrower repays the loan in predetermined increments. These payments include interest at a set rate. If the company defaults on their payments, the creditor may either permit the borrower to sell the assets or assume and sell the assets themselves.
Fixed Debentures vs. Floating Debentures
A fixed debenture is an alternative to a floating debenture. In a floating debenture, an entire class of assets must be signed over to the creditor. However, in a floating debenture, the creditor generally does not have any control over the mortgaged assets. For example, a manufacturing company borrowing money through a fixed debenture may have to sign over its main factory building to a creditor. Until the loan is repaid in full, the creditor may restrict the company from selling or subleasing that piece of property.
However, the company could instead use a floating debenture. In this case, the company could sign over all of the inventory it holds in its warehouses. That inventory is continually in flux but still has value. With a floating charge debenture, the company would still be able to sell its stock as usual, even though it was signed over to the creditor. The company would then regain control over all of its inventory with the full repayment of the note.
Floating debentures may also change into fixed debentures. There may be certain conditions specified by the lender that would cause the debenture to “crystallize” and turn from floating debenture to fixed debenture. These conditions usually include default and liquidation.