A debenture in finance, is a long term debt instrument
used by governments and large companies to obtain funds. It is similar
to a bond
except the securitization conditions are different. A debenture
is unsecured in the sense that there are no liens or pledges on
specific assets. It is however, secured by all properties not otherwise
pledged. In the case of bankruptcy
debenture holders are considered general creditors.
The advantage of debentures to the issuer is they leave specific assets unencumbered, and thereby leave them open for subsequent financing.
In practice the distinction between bond and debenture is not always maintained. Bonds are sometimes called debentures and vice-versa.
A specific type of debenture is the subordinated debenture. In the event of liquidation, these debentures are subordinated to designated debt obligations, typically bank loans or notes payable. That is, the debenture holders will not get paid until the senior debt, named in the debenture, have been paid.
