The issuance of private debt securities is becoming increasingly popular among corporations and institutional investors looking for ways to finance their operations. Private debt securities are often seen as a more attractive alternative to public debt, as they are generally free from the costly underwriting and disclosure requirements of public debt instruments. Private debt securities also offer relatively higher yields than their public counterparts.
Private debt securities are non-convertible securities, generally issued by corporations and backed by the issuing company’s promise to repay, plus interest, at a predetermined time. Similar to public securities, private debt instruments can have many structural features, including terms of payment, repayment amounts, and other features such as convertibility into common stock at the issuer’s option.
Private debt securities are generally issued through private placement, meaning that they are not registered or traded on any public exchange. Private placements of debt securities require a private offering memorandum, which contains information regarding the issuer, the security, and other items related to the offering. Private placements typically involve fewer associated fees than public debt offerings, however, fees related to legal advice, accounting and audit costs, and other services related to the preparation of the private offering memorandum must still be taken into consideration.
Private debt securities are typically unsecured and are not backed by any type of collateral, making them riskier than secured debt and public debt securities. As with any investment, investors should thoroughly examine the various features and risk factors associated with the issuer and private debt security before investing.
In addition to the inherent risks mentioned earlier, private debt securities can be subject to certain investment and federal income tax requirements. Investors should evaluate the external factors that may be related to private debt investments and should consult a tax advisor when purchasing or selling private debt securities.
Despite their higher risk, private debt securities offer investors the potential for greater returns than public debt securities. This potential increases when private debt securities are purchased at a discount due to less liquidity and less investor protection. As a result, investors should pay close attention to the features and risks associated with private debt securities before investing and evaluation should be done with assistance from legal and financial advisors.
