Equipment Trust Certificates: Exploring the Mechanics, Types, and Risks

An equipment trust certificate (ETC) is a pragmatic financial instrument empowering companies to secure and utilize assets while spreading payments over an extended period. Initially designed for financing railway cars, ETCs have evolved to become integral in modern aircraft and shipping container transactions. Investors engage by purchasing certificates, establishing a trust to facilitate the acquisition of assets subsequently leased to companies. Once the debt is settled, the asset’s title transitions to the acquiring company, akin to a mortgage or car loan secured by tangible assets.

Equipment trust certificates represent medium- to long-term debt instruments enabling companies to leverage assets while repaying the incurred debt over an extended period. Investors participate by purchasing certificates, generating capital for a trust to acquire an asset, typically leased to a company. The distribution of payments from lessees is then disseminated among certificate holders. In the event of borrower default, the lender retains the right to reclaim the asset. Widely adopted by airlines for aircraft purchases, ETCs offer tax advantages due to the temporary lack of asset ownership during the financing period.

Enhanced equipment trust certificates (EETC) operate through special purpose vehicles (SPEs), consolidating multiple equipment purchases into a single debt security. Airlines favor EETCs for financing aircraft acquisitions, benefiting from cost savings and increased flexibility. The introduction of tranches, distinct slices of debt with varying seniority, risks, and credit ratings, further enhances the structure of EETCs. Regulatory bodies scrutinize EETCs for their treatment as separate economic entities, emphasizing the need for transparency in financial statements.

The primary purpose of an ETC is to allow companies to acquire and utilize assets while spreading payments over an extended period. It serves as a medium- to long-term debt instrument facilitating the financing of tangible assets.

EETCs, operating through special purpose vehicles, consolidate multiple equipment purchases into a single debt security. The introduction of tranches with varying seniority, risks, and credit ratings enhances EETCs, making them a preferred choice for airlines in equipment financing.

Lessees using ETCs benefit from tax advantages as they don’t hold title to the asset during the financing period. This temporary lack of asset ownership exempts them from paying property taxes until the debt is fully paid off.

ETCs offer protection by allowing the trust to reclaim the asset in the event of a company going bankrupt or insolvent. If a lessee defaults on financial obligations, the trust retains the right to reclaim the leased asset.