What is a Junior Debenture? A Comprehensive Legal Overview
Definition & Meaning
A junior debenture is a type of bond that is repaid only after senior debentures have been settled in the event of the issuer's financial distress. It is typically issued by manufacturing or industrial corporations and is supported by the issuer's overall creditworthiness. Unlike secured bonds, a junior debenture does not create a lien on the corporation's assets, meaning it is not backed by specific property. In the case of liquidation, junior debentures have a claim on assets that are not specifically pledged to senior debt holders once their claims are fulfilled.
Legal Use & context
Junior debentures are commonly used in corporate finance and investment contexts. They are relevant in areas such as securities law and bankruptcy law. Investors often encounter junior debentures when assessing the risk and return profile of their investment portfolios. Users can manage related legal documents, such as bond agreements or investment contracts, using templates available from US Legal Forms.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A manufacturing company issues junior debentures to raise capital for expansion. If the company faces financial difficulties, it must first pay off its senior debentures before addressing the junior debenture holders.
Example 2: An industrial corporation goes bankrupt, and its assets are liquidated. The proceeds from the sale of assets are first used to satisfy the claims of senior debenture holders, with any remaining funds available to junior debenture holders. (hypothetical example)