Understand what debentures are and how they work

Debentures are a type of fixed income investment and are debt securities issued by publicly traded companies on the stock exchange and function as a fundraising for these companies. Thus, it is as if investors were “borrowing” money in exchange for future income.

In 2021, the demand for this investment doubled compared to the previous year, according to data from the Brazilian Association of Financial and Capital Market Entities (Anbima).

THE CNN Brasil Business prepared a guide with all the details about the product that has gained more and more attention from investors, thanks to its financial return.

What are debentures?

Debentures are debt securities issued by publicly traded companies on the stock exchange for the execution of specific projects. They are a fixed income investment that offers future interest, based on the maturity date, when the investor receives the invested amount plus the reported yield.

They look like a public or private bond, but with the difference that, in order to issue them, it is necessary to have a clear destination. Thus, companies often resort to this solution when they want to pay off debt or expand their business. Upon acquiring the debenture, the investor becomes the company’s creditor until it is paid off on the scheduled date.

The issuance of debentures is registered with the Securities and Exchange Commission (CVM) and the units offered in banks and investment brokerages. In 2021 alone, according to an Anbima report, more than BRL 253.4 billion were raised through these debt securities, a record in the historical series.

This demand has an explanation: when compared to other fixed income products, the profitability of a debenture is usually more attractive. On the other hand, its maturity is also longer than that of its competitors.

What are the types of debentures?

Although the acquisition of debt securities is done in a single way, there are several models of debentures in the Brazilian market. The main ones are as follows:

• simple debenture: model most commonly found in banks and brokerage firms, its main characteristic is the long maturity period, between 2 and 10 years. It gives the investor the right to receive, in cash, the amount plus interest accrued during the period.

• convertible debenture: different from the simple one, after expiration, the investor can redeem its value converted into shares. In this case, he becomes a shareholder, and no longer a creditor, according to the rules provided for in the Material Fact.

• exchangeable debenture: instead of cash or shares of the issuing company, it is possible to convert the value into shares of other companies. This transaction is also provided for in the contract that guarantees the exchange at the end of the period.

• Incentive debenture: exempt from income tax, it is one of the most advantageous modalities, as it offers greater possibilities of income. This type of title is exclusive to companies that have an infrastructure project that benefits society, so they have the tax incentive.

How much do debentures yield?

There are three types of remuneration for debentures:

• prefixes: the interest rate is fixed and set before purchase. Example: 10% per year.

• Post fixed: interest is linked to some economic index, such as the Selic, DI or IPCA, with variation over time. Example: 100% of CDI.

• hybrids: join the prefixed rate with an economic index. Example: IPCA + 6.5% per year.

How to invest in debentures?

The purchase of debt securities takes place in the same way as other products: at the brokerage house where the account is kept. The first step is to open a registration in an institution that offers the product and fill out a questionnaire of suitability that defines the profile of each investor.

Then, just open the investment home broker, click on the fixed income option and choose the most attractive debenture, based on the information available. These bonds do not offer the possibility of fractional purchase, therefore, the investor must pay the full value of each unit, which may vary between companies.

Another aspect of the debentures is that some options can only be purchased by so-called “qualified investors”, those who, according to CVM rules, are professionals, experienced or have already invested more than R$ 1 million.

Is it safe to invest in debentures?

Unlike Treasury Direct and CDB, there is no body that ensures or indemnifies the payment of debentures. So, this operation involves the risk that, on the maturity date, the issuing company will not be able to pay the commitment and give a kind of “default” to investors, although this is not so common.

Therefore, before opting for a debt security, it is important to check the company’s credit risk, also known as rating, informed before the purchase.

What is rating?

Translated into Portuguese, rating means “classification”, and is used to define an institution’s credit risk. In practice, it is like the “score” of countries, companies and banks, ranging from AAA (best grade) to D (worst grade). In Brazil, there are three main risk rating agencies: Moody’s, Fitch and Standard & Poor’s.

Among the information on the debenture, banks and investment brokers display the issuer’s risk rating, which gives the investor an idea of ​​the company’s ability to return the amount and interest promised at the time of the transaction.

Do debentures have fees?

The amounts invested in debentures are subject to two taxes, in addition to the fees charged by brokerage firms. The Tax on Financial Operations (IOF) is only levied on redemptions made before completing one month, at a regressive rate from 100% to 3% on earnings.

Income Tax, except for tax incentives, varies between 22.5% and 15% on earnings, depending on the redemption period, as shown in the following table:

investment time	Aliquot
Up to 180 days (6 months)	22.5%
From 181 to 360 days (1 year)	20%
From 361 days to 720 days (2 years)	17.5%

What is the difference between debentures and shares?

Although they involve companies listed on the stock exchange, debentures and shares are different things. The issuance of debentures is a way of raising funds to finance projects, and the profit for investors – also known as creditors – comes from the interest rates agreed upon at the time of application.

Shares are small parts of the company traded on the financial market for potential new partners. In this case, the gains come from the appreciation of each share, in addition to the division of profits via the payment of dividends and interest on equity, which depend on the periodic results.