An equipment trust certificate (ETC) is a
financial security used in
aircraft finance
Aircraft finance refers to financing for the purchase and operation of aircraft. Complex aircraft finance (such as those schemes employed by airlines) shares many characteristics with maritime finance, and to a lesser extent with project finance.
...
, most commonly to take advantage of tax benefits in
North America
North America is a continent in the Northern Hemisphere and almost entirely within the Western Hemisphere. It is bordered to the north by the Arctic Ocean, to the east by the Atlantic Ocean, to the southeast by South America and the Car ...
.
[Peter S. Morrell, ''Airline Finance'' (Ashgate, 1997), p. 153.]
Details
In a typical ETC transaction, a "trust certificate" is sold to investors in order to finance the purchase of an aircraft by a
trust
Trust often refers to:
* Trust (social science), confidence in or dependence on a person or quality
It may also refer to:
Business and law
* Trust law, a body of law under which one person holds property for the benefit of another
* Trust (bus ...
managed on the investors' behalf. The trust then leases the aircraft to an
airline
An airline is a company that provides civil aviation, air transport services for traveling passengers and freight. Airlines use aircraft to supply these services and may form partnerships or Airline alliance, alliances with other airlines for ...
, and the trustee routes payments through the trust to the investors. Upon maturity of the note, the airline receives title to the aircraft.
The lease is not a "true" lease because the airline receives title at the end. Therefore, ETCs are a form of
secured debt financing similar to a
mortgage
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pu ...
. Because the aircraft is not owned by the airline until maturity, the aircraft is not considered airline property for the purposes of
bankruptcy
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...
; however, alternative forms of financing such as mortgage and
securitization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
lead to the same result, making this a relatively minor advantage in comparison to the tax benefits.
[Morrell, pp. 186-187.]
An Enhanced ETC, also known as a Double-E TC, is similar to a conventional ETC except that the security has been divided into two or more classes of
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
, each with different payment priorities and asset claims. The more senior certificates (those with highest priority) have a higher
credit rating
A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
...
and may obtain an
investment grade
In investment, the bond credit rating represents the credit worthiness of corporate or government bonds. It is not the same as an individual's credit score. The ratings are published by credit rating agencies and used by investment professionals ...
rating for the particular issue. EETCs issues are similar to
securitization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
transactions in that ownership remains with a separate trust rather than the operator, which has different tax implications.
See also
*
Sale and leaseback
Leaseback, short for "sale-and-leaseback", is a financial transaction in which one sells an asset and leases it back for the long term; therefore, one continues to be able to use the asset but no longer owns it. The transaction is generally done fo ...
References
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Securities (finance)