Debenture Trust Deeds: Understanding the Key Elements & Benefits

Pile of paper-clipped paperwork.

A debenture trust deed is a debt instrument that is accompanied by a contract for repayment from the company issuing the debt. The company receives cash to fund its capital expenditures, and the investor receives guaranteed interest and principal payments. Because the payments are guaranteed, the risk to the investor is lower. This allows companies to raise capital at lower interest rates than with other types of debt instruments.

Debenture Trust Deed Contracts

The contract must specify the interest rate and dates of interest and principal payments. Some debenture contracts also include requirements for the issuing company, such as minimum liquidity ratios and profit margins, acceptable levels of financial risk and disclosure of the company's credit rating.

Trustee Requirements

Only banks, insurance companies and other public financial institutions may serve as a debenture trustee. The institution may not be named as a trustee if it holds a share of the company, receives financial compensation from the company or guarantees any other type of debt instrument. The trustee's duties include requesting periodic reports from the company and enforcing the security interests of debenture holders according to the trust deed's provisions.