Debentures: What Are They and How to Invest?

Here at financial coaching, we talk a lot about debentures as an alternative to investing in fixed income. But what are debentures?

If you want to know what debentures are, read to the end and discover not only that but how everything works and how to invest.

What are debentures?

In fixed income investments, you take your money and borrow it from some other agency waiting for the interest. You can lend your money to the government as with Treasury Direct. You can also lend your money to the bank like CDB, LCI and LCA. In other words, lend your money and receive interest as a reward.

Investing in debentures is nothing more than lending your money to a private company. It is an investment model where you lend your money to companies and get your capital back plus interest.

You may ask yourself: why would the company take money from you and not from the bank?

Because in this way, the company manages to have control over the form of payment and interest. It can reconcile the flow of payment to the investor with the maturation of your project. So, in terms of cash flow, funding via debentures is more viable than a bank.

Nominal Debentures

This modality is scarce in Brazil, it refers to debentures that are issued by the company itself and it is itself responsible for the issues and transfers. 

Debentures Booked

In this modality, the entire process is intermediated by an investment platform or stockbroker. This intermediation must be registered by B3.

Profitability of a debenture

Compared to other types of fixed income investments, the debenture has a certain advantage in profitability. However, this profitability advantage is associated with the risk of the modality. Was it difficult to understand? To make it easier, let's make a comparison.

When you invest in Treasury Direct, you have more security because this investment is guaranteed by the Government. When it comes to a company, the stakes are higher. So, to be more attractive to investors, debentures offer better interest. And consequently, the profitability is a little higher.

Debentures have a maturity date, sometimes it is possible to know how much the profitability will be before contracting.

Pre-fixed profitability: you already know how much the income will be even before hiring.

Post-fixed profitability: this modality is linked to an index. It can be indexed to the CDI, or also to the Selic rate. In this case, despite being fixed, the contractor only knows the profitability at maturity.

Hybrid profitability: this modality guarantees part of the profitability and another part is indexed to some index such as the IPCA, for example.

 

Incentive debentures

There are some products in this segment that are encouraged. They are exempt from income tax. So, in addition to the interest benefit, you have a tax-free return. This boosts your profitability.

This type of debenture is issued when the company is carrying out an infrastructure project. This is a government incentive for investors to facilitate the company's fundraising.

Risk assessment (rating) and guarantees

Before investing in a debenture, you have to be aware of the rating. Rating is a kind of risk level in which the debenture is rated. The higher the rating number, the lower the risk. The lower the number, the riskier the investment.

Thus, profitability tends to be lower the higher the rating grade. When the grade is low, the debenture offers greater profit possibilities. So, if you are planning on investing in debentures, stay tuned. Check that the rating level is in line with your investor profile.

Some people are looking for more security and prefer a higher level. More daring investors, on the other hand, prefer risk for the opportunity for greater profits. What's your profile?

Some debentures offer an additional guarantee in the event of bankruptcy. These guarantees can be some property of the company, such as buildings, factories, land and others.

Floating guarantee: this guarantee gives priority to debenture holders in the event of the company's bankruptcy. Debenture holders have priority over shareholders. This guarantee can be realized through the company's assets.

Unsecured Warranty: this warranty is the most inexpressive, after all, it does not actually express a real warranty. In case of bankruptcy or composition, the debenture holder has no priority.

Subordinated guarantee: Subordinated debentures offer higher returns because they are the riskiest. In the event of bankruptcy, the shareholder has priority over the debenture holder.

Term and liquidity of a debenture

If you are looking for a long-term fixed income investment, debentures can be a great deal.

There are debentures with different maturities, but it is common to see 10-year maturities for redemption.

A disadvantage of debentures is low liquidity. You may even be able to sell your debenture before it expires, but you could end up losing money if it goes down in value. Full yield guarantee even only at the end. So be careful before investing in this modality.

How to invest in a debenture?

You can consult your investment broker. Today there are digital brokerages that make it much easier when investing.

If you want to find a debenture in issue, look for a way to get notified. Otherwise, it remains only to buy on the secondary market. Through your brokerage, you can find out information such as the form of income, maturity and type of guarantee.

 

Try to invest in a debenture as a form of portfolio diversification. After all, due to the risk involved, it is worth protecting your assets by allocating them to different types of assets.

You Can contact to John Labunski for Safe Investment, Investment Finder Investment Advice and Safe Retirement plan.