What are the characteristics of debentures?
The debentures are not equal to each other, having individual characteristics. For example, a well-known company may not need to provide real guarantees to attract buyers of its debentures, while lesser-known companies may offer physical guarantees to attract its creditors.
If you are new to the world of debentures , read this article here before proceeding.
What is an Incentivized Debenture?
It is a debt security of a company that obtains a tax benefit , as the government considers its activities indispensable for the maintenance of the country. Therefore, the debenture holder , who is the company's creditor , is exempt from income tax.
Are debentures always encouraged ? No, they are often taxed by the IR and therefore you must be aware.
What are the guarantees of a debenture?
Real guarantees: A company offers real estate or other tangible assets as a guarantee for the payment of debentures issued by them.
Unsecured guarantees : There is no physical guarantee that the company will honor the payment of its bonds.
Does the debenture have FGC?
The Credit Guarantee Fund (FGC) is a credit guarantee up to the limit of R$250,000 granted only to bank securities. As the debentures are debt securities of private, non-banking companies, they are not guaranteed by the FGC.
An investment in debentures is considered more risky than bank securities for the individual investor. However, I have a different perception, but I leave that subject for a next post. Click here
What are convertible and exchangeable debentures?
Convertible Debentures: Debentures that can be converted into company shares . That is, the debenture holder has the option of ceasing to be a creditor to become a partner of the company. Therefore, the debenture holder no longer receives the “Coupon” (receipt of interest) and starts to have a share in the company's profit.
Non-convertible debentures: These are securities that cannot be converted into equity interest. The vast majority of debentures are non-convertible.
Exchangeable debentures: These are the titles that give the right to the debenture holder to exchange their debentures for some asset of the issuing company , which can be from a physical asset such as, for example, a property or even shares of the company itself and of affiliated companies.
What is the term of a Debenture?
When you invest in a bond, there are two components working in your favor. The first is the coupon received periodically; the second is the main value . If you bought, for example, a debenture for R$1,000.00 that yields 6% pa. you will have received R$ 60.00 in interest per year and on the maturity date you will receive the invested amount (principal) of R$ 1,000.00 back.
Amortization on the maturity date: the vast majority of debenture issuing companies choose to return the principal only on the maturity date.
Amortization in installments: Some companies choose to return the principal gradually, to facilitate the payment of the debt. This reduces the risk of default by the issuer.
Lifetime Amortization: What is a Lifetime Debenture?
The lifetime debentures of the company Vale do Rio Doce are debt securities that will pay interest (coupon) for the rest of the company's existence, with no debt amortization . In my view, lifetime debentures are limited to companies that are government controlled and therefore have reduced credit risk .
How does the remuneration of debentures work?
Corporate bonds (another name for debentures) have two remuneration components:
The first one is the capital gain , which is usually linked to some index, and the most important one is inflation ( IPCA ). Therefore, these roles “hold inflation” efficiently.
The second of them, and my favorite, is the yield , as this type of investment deposits an amount in the investor's account every period. The investor receives a cash flow that he can use to pay his day-to-day bills, or even use to reinvest . If you are thinking of living on income, debentures, when well selected, can help you in this mission. I leave the link here that explains in detail the remuneration of the debentures.
Debenture an example in practice.
To invest in debentures you must have an account at a bank that has an investment account, the vast majority of banks have this option, the only exceptions are cooperative credit banks. That said, just ask your manager or Autonomous Investment Agent for a list of the debentures available for purchase at the moment.
Image1: Debentures card for sale at Banco do Brasil (BB) on 07/14/2022.
Image 2: Zoom of the debentures card for sale at BB on 07/14/2022
I selected, for our case study, the Vale do Rio Doce debenture. With the debenture code VALE29, see second column, I can access some relevant information on the ANBIMA website.
Image 3: Debenture information from our case study - Source: ANBIMA
On the ANBIMA website we have all the relevant data, we can check the original remuneration , the profitability start date, maturity date, quantity issued by the company, as well as all the bookkeeping and amendment documents.
In the documents tab I can download the documents related to the deed and have access to some important information such as guarantees :
Image 4: Type of debenture VALE29
Whether they are convertible or interchangeable :
Image 5: Convertibility and Exchangeability of the VALE29 debenture
Title compensation information:
Image 6: VALE29 debenture profitability - Source of images 4,5,6: ANBIMA
Anyway, it is in the bookkeeping that we have all the necessary details we need to carry out a more careful assessment of emissions. The ANBIMA website is very complete and in order not to make this post long I intend to write in detail in another article. Click here
Investors today have a wide range of investment options at their disposal. As such, debentures are part of the alternatives available in this market. However, like any investment, some precautions are necessary, such as reading the company's documents, trying to find out about the latest news, knowing where the issuing company is allocating its resources, among others. If your goal is to gradually get rich looking for an extra income that helps pay your household bills, debentures represent an interesting alternative in the “menu” of available investments .
To think about
- How to minimize the credit risk of debentures?