Equipment Trust Certificate
Encyclopedia
An equipment trust certificate (ETC) is a financial security used in aircraft finance
, most commonly to take advantage of tax benefits in North America
.
In a typical ETC transaction, a "trust certificate" is sold to investors in order to finance the purchase of an aircraft by a trust
managed on the investors' behalf. The trust then leases the aircraft to an airline
, 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. Because the aircraft is not owned by the airline until maturity, the aircraft is not considered airline property for the purposes of bankruptcy
; however, alternative forms of financing such as mortgage and securitization
lead to the same result, making this a relatively minor advantage in comparison to the tax benefits.
An enhanced ETC, also known as a double ETC, is similar to a conventional ETC except that the security has been divided into two or more classes of securities, each with different payment priorities and asset claims. The more senior certificates (those with highest priority) have a higher credit rating
and may obtain an investment grade rating for the particular issue. EETCs issues are similar to securitization
transactions in that ownership remains with a separate trust rather than the operator, which has different tax implications.
Aircraft finance
Aircraft finance refers to financing for the purchase and operation of aircraft. Complex aircraft finance 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
North America is a continent wholly within the Northern Hemisphere and almost wholly within the Western Hemisphere. It is also considered a northern subcontinent of the Americas...
.
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 law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...
managed on the investors' behalf. The trust then leases the aircraft to an airline
Airline
An airline provides air transport services for traveling passengers and freight. Airlines lease or own their aircraft with which to supply these services and may form partnerships or alliances with other airlines for mutual benefit...
, 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. Because the aircraft is not owned by the airline until maturity, the aircraft is not considered airline property for the purposes of bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. 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
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 and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...
lead to the same result, making this a relatively minor advantage in comparison to the tax benefits.
An enhanced ETC, also known as a double ETC, is similar to a conventional ETC except that the security has been divided into two or more classes of securities, each with different payment priorities and asset claims. The more senior certificates (those with highest priority) have a higher credit rating
Credit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are...
and may obtain an investment grade rating for the particular issue. EETCs issues are similar to securitization
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 and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...
transactions in that ownership remains with a separate trust rather than the operator, which has different tax implications.
External links
- Commercial aircraft financiers - Commercial aircraft financiers listed by area of presence/activity (expertise summary provided)