What is unsecured bonds?

Unsecured bonds, also known as debentures or senior notes, are a type of corporate bond in which the issuer does not pledge any specific assets as collateral. Instead, the bond is backed by the issuer's general creditworthiness and ability to repay the debt.

Here are some key points about unsecured bonds:

1. No collateral: Unlike secured bonds, unsecured bonds do not have specific assets attached as collateral. This means that if the issuer defaults on the bond, the bondholders have a claim on the general assets and cash flows of the company but not on any specific property.

2. Higher risk, higher yield: Unsecured bonds carry higher risk compared to secured bonds because of the lack of collateral. As a result, they generally offer higher interest rates or yields to compensate investors for taking on greater risk.

3. Subordinated status: Unsecured bonds typically have a subordinated status, meaning that in case of default, they are paid after secured bondholders and other senior creditors. This subordinated position implies higher risk for investors.

4. Creditworthiness and credit rating: The creditworthiness and credit rating of the issuing company play a crucial role in determining the pricing and demand for unsecured bonds. Companies with strong financials and higher credit ratings are more likely to attract investors and offer lower coupon rates.

5. Market liquidity: Unsecured bonds are generally more liquid than secured bonds, as they are not tied to specific assets that could impact their trading ability. This increased liquidity can be beneficial for investors who plan to sell their bonds before maturity.

6. Convertibility: Some unsecured bonds may have convertibility features, allowing bondholders to convert their bonds into the issuer's common shares at a predetermined conversion price. This feature provides added potential for capital appreciation and may lead to lower borrowing costs for the issuer.

7. Legal recourse: In case of default or bankruptcy, unsecured bondholders may have legal recourse to recover their investment through bankruptcy proceedings. However, the recovery amount may be lower compared to secured bondholders who have priority in accessing the issuer's assets.

It's essential for investors considering unsecured bonds to assess the issuer's financial health, industry risk, credit rating, and other relevant factors before making an investment decision.