Equipment Trust Certificate (ETC)

Definition

The term equipment trust certificate is used to describe a debt instrument that is held by a trust and secured by a specific asset.  Equipment trust certificates are typically backed by an asset that can be readily transported and sold.  Once the debt has been repaid, ownership of the asset is transferred to the issuer of the certificate.

Explanation

Oftentimes described as a hybrid between a mortgage and a lease, an equipment trust certificate (ETC) is a debt instrument issued by companies to finance an asset used in operations.  A trust is first established, which will hold the title to the equipment.  Investors (creditors) then purchase the trust certificates, thereby providing the trust with the capital to purchase the equipment.

Over time, the company makes payments to the trust, providing creditors with interest income.  Title to the equipment is transferred from the trust to the company (issuer) when the debt to creditors has been repaid.  ETCs are usually backed by equipment that can be easily transported and marketed.  They were originally used to finance the purchase of railway box cars; however, today they're typically used to finance the purchase of airplanes and shipping containers.

Since the trust holds title to the equipment, ETCs are thought to provide property tax benefits to issuers as well as some protections during bankruptcy proceedings.

Related Terms

revenue-anticipation notes, tax-anticipation note, bond-anticipation note