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A debtholder is the investor who holds a debt instrument, most commonly a bond. With bonds, the terms bondholder and debtholder are used interchangeably. In the event of bankruptcy, ownership of the bond issuer transfers from stockholders to debtholders. If the bankruptcy results in a complete liquidation, the debtholder is paid out of the proceeds first. The debt held by a debtholder can be senior debt or subordinated. A debtholder possessing senior debt is in the most secure position, because senior debt obligations are paid ahead of subordinated ones. Default is not the only way for a debtholder to become a shareholder. With a convertible bond the debtholder has a choice to convert the debt to shares of preferred or common stock. |
