DevDosh Ltd investors hold the strongest security possible for any debt investment. Our investors are shareholders in the SPV that issues the real estate development mortgage and holds the 1st charge over land and structures. They literally own and control the debt.
It is important to be aware that there are many other debt instruments for investors with an apatite for less well secured debt. We recently completed a trilogy of short articles on bonds and their varying degrees of security and payout order. This short blog will provide the reader with a snap shot of debentures and loan notes. Debt is, without doubt, one of the safest forms of investment. However not all debt investments are created equal and knowing each instruments characteristics is essential to manage a well balanced and diversified portfolio.
As with all financial instruments there are many variations on a theme. On that basis the following notes will provide a brief overview on the broadest definitions of the product types with a short reference to their mildly more exotic counterparts.
Debentures are a form of debt which is typically characterised by its lack of collateral security. It is generally not backed by a specific asset. Rather it’s security on default will rely on the corporations credit worthiness. For this reason debentures attract a higher interest rate. Debentures are most frequently used for raising finance to fund operational costs. Their tenure tends to be long with 10 year terms or perpetual status.
There are many variations of debenture including; convertible debentures which may be converted to share ownership, asset backed debentures such as fixed debentures that allocate a specific piece of collateral to back the debenture and floating debentures which holds a lien over non-fixed assets such as shop floor stock and participating debentures which split interest payments into three different phases to make credit payment more affordable for start ups in venture capital situations.
Loan Notes are a contracted and more detailed version of an IOU. It will state the loan amount, repayment schedule and interest rate. Furthermore it will set out the legal obligations of the parties. Should either party fail to meet their legal obligations the note will specify their rights to remedy including penalties or third party arbitration. The note is considered satisfied upon full repayment of the debt.
Loan notes carry tax benefits. In the business world investors may be offered a loan note as an alternative to a cash payment. The “loan” is repaid in installments making the payout more comfortable for the business and is recorded as a debt repayment by the investor to minimise tax implications.
Loan notes take precedence over IOU’s in court and will hold fast as long as one party can not prove that they entered into the agreement under duress or misunderstanding. Loan notes are not as strong as indenture agreements which govern bonds, debentures and 1st charge real estate development mortgages.
DevDosh Ltd considered all forms of loan security when we appraised the debt investment market. We wanted to get the very best debt security for our investors which is why we settled on the ring fenced 1st charge real estate development mortgage. For the safest 10% yield in today’s fixed income investment market contact DevDosh Ltd today.