Debentures are "debt securities" issued by the private sector in order to raise funds for use in various activities of the company e.g. for investment, expanding business, buying equipment or building factories. Debentures can be divided into the unit and each unit has equal value. In Thailand, the issuance of debentures is usually set at 1,000 baht per unit, and most debentures have a minimum purchase value of 100,000 baht or more in case of selling to investors institution or large investors

In investing through debentures, the buyer of the debenture will be a creditor while the bond issuer will be in debtor status who comes to borrow money with a promise to pay back the loan interest to the borrower at a certain rate according to the terms of the loan agreement which is a medium to long term contract, for example, 3-year to 10-year bonds. Debentures are like government bonds. The difference is only government bonds issued by the government while the bonds issued by private companies.

Bond yields will be in the form of interest. Payments of interest are made twice a year or every 6 months. But for some debentures, it may be paid 4 times a year or every 3 months. And the interest received from the debentures is subject to a 15% withholding tax, just like those for from other types of interest.

Type of debentures

At present, the company issuing debentures has issued various forms of debentures. This is to attract investors to be interested in the company's debentures and to enable the company to issue debentures at a low-interest rate. Examples of debentures that are currently offered for sale are as follows

• Subordinated Bond or Junior Bond In the case that the issuer goes bankrupt, Bondholders of this type will have the right to claim assets from issuers, ranked inferior to other ordinary creditors but will be higher than the holders of preferred shares and ordinary shares which have the last right to claim
  
  
• Senior Bond Bondholders of this type will have the right to claim assets from issuers, qual to other ordinary creditors and higher than those of subordinated debentures, preference shareholders and ordinary shareholders respectively
  
  
• A convertible bond is a debt instrument that investors can change from bonds to ordinary shares of the issuing company at a fixed price in which the issuer will issue ordinary shares in an amount equal to the debt instrument being held. So, the status of investors changed from creditor to owner. With ownership status, therefore, investors have an opportunity to receive profit from the difference between the purchase price and the selling price (Capital Gain) if the stock price increases. But if the stock price in the market is still lower than the conversion price, Investors can choose not to convert into shares and will continue to be considered as a debt instrument to receive interest as specified in each installment (which will be lower than the normal debentures of the same issuer) and receive the principal at par at the expiration date
  
  
• Secured Bond is the debenture that the issuer pledge assets as collateral for debentures and the holders have full rights to the assets pledged above other ordinary creditors. In practice, a person often acts as a Bond Holder Representative in order to check the status of the collateral assets.
  
  
• Unsecured Bond is a bond that has no assets placed as insurance for issuance. If the issuers bankrupt, they have to divide assets with other creditors according to their rights and proportion

For Preferred Stock it is not a type of debenture. It is an equity instrument similar to ordinary shares but just there is no voting right in the administration. There is a difference from ordinary shares, that is Preferred shareholders are entitled to return capital before ordinary shareholders in case the company is liquidated.

Benefits from investing in debentures

• To be a regular source of income since debentures and bonds are paid in installments to investors and will repay the principal when the maturity of the debentures. It is suitable for investors who need regular income and wants the principal of that investment to remain fully
  
  
• Receive a higher rate of return than depositing money. Debentures of private companies tend to offer higher interest rates than investing in government bonds of similar nature and investment age. This higher interest rate compensates for the increased risk. Since the debentures issued by private companies are at risk of default more than government bonds. For the difference between the rate of return, it depends on the credit rating of the debentures which will be rated by the credit rating institution which is a middle-aged company that evaluates the credit rating of each issuing company. If it is in a high ranking or good credit, this shows as having a low risk but the interest rate received from debentures also has a lower tendency as well when compared to companies with lower credit ratings
  
• To be able to trade and exchange. Another advantage of buying debentures is that they can be traded in the secondary market such as the Bond Electronic Exchange (BEX) established by the Stock Exchange of Thailand by not need to wait until the expiration date. However, trading liquidity may vary according to the size and condition of each bond. If investors are interested in trading bonds in the secondary market, they can trade through brokers or a securities brokerage company that is a member of the stock exchange
   

Credit Rating

A credit rating is a credit risk assessment tool that is widely used. Each credit rating has a letter symbol such as AAA or AA to indicate the relative risk which helps those involved either the issuer of the instrument, financial institutions, underwriters, and investors can understand more easily how the risks of both the issuers and the debt securities are more, equal or less than other instruments.

The credit rating disclosed to the public is prepared by the Credit Rating Agency, which are international institutions like Standard & Poor’s (S & P’s), Moody’s and Fitch Ratings. The Credit Rating Agency is responsible for credit ratings of companies around the world, including national credit ratings. In Thailand, there are TRIS Rating and Fitch Ratings (Thailand). Here are the short meanings of the credit ranking that can be invested is from BBB up.

Risks from investing in debentures

• Liquidity Investment in long-term debentures without planning may cause an event for which you need money before the investment is due and have to sell in the secondary market And as a result, you may have to sell, lose, or not receive the money you deserved if you continue to hold until the maturity
• Interest rate risk is the opportunity that interest rates will change and affect your investment. For example, if interest rates in the market increase, bonds price will decrease. For example, if you invest in bonds with an interest of 4% per year for 5 years, your money will be locked at a 4% yield for 5 years. If time passes and the interest rates in the market increase, you will lose the opportunity to invest money in assets that provide higher returns, such as new bonds that may yield more than 4%. This is called the Opportunity Cost (the opportunity that you will invest money in assets that offer better return rates than you currently receive.).Therefore, if you want to invest money in new bonds and would like to sell out the investment in old bonds, you will have to sell at a discounted price. Because if you take the old debentures to sell to investors in the secondary market with the price of the ticket you bought, there won't be any investors buying with you. That’s because everyone would like to invest in a new set of bonds that offer better returns. Let’s assume that the newly issued debentures give the interest rate of 5% with a 1% interest difference. Therefore, investors will buy bonds from you only when you have a discount equal to the 1% difference in interest.

• Credit risk is an opportunity for the company to which you invest your money. There is no ability to repay the debt. As a result, the company may not agree to pay the debtor may be filed for bankruptcy. As a result, your investment can damage, that is you may not receive interest as agreed or you may lose all the principal you invested.

Therefore, before deciding to invest in debentures, investors should consider investment goals and the investment period clearly and consider the credit ratings of those debentures whether it matches the level of risk that you can accept.

Nipapan Poonsathianrasap CFP,

Independent Financial Advisor, Writer, and Lecturer.