What is an Equipment Trust Certificate?

An equipment trust certificate (ETC) is a debt that is secured by an asset. While a borrower is paying off the debt, the title to the asset is held in trust. The trust holds title to the asset, and investors buy trust certificates, thereby providing the trust with sufficient capital to buy the asset. Once the debt is paid off, the title is transferred from the trust to the borrower. This approach provides additional security to the lender, and is essentially a form of secured debt financing. An ETC is commonly used for the acquisition of aircraft by airlines. It is also used by railways to purchase railway cars.

Examples of Equipment Trust Certificates

Here are several examples of how equipment trust certificates to finance asset purchases:

Aircraft financing. A commercial airline wants to purchase new aircraft. The airline issues ETCs to investors to finance the aircraft purchase. The aircraft serves as collateral for the certificates. Investors receive periodic interest payments, and the airline repays the principal over time. Once the certificates are fully paid off, ownership of the aircraft transfers from the trustee to the airline.
Railroad equipment financing. A railroad company needs to purchase locomotives and freight cars. To do so, the railroad company establishes a trust that buys the equipment and issues ETCs to fund the purchase. The railroad makes lease payments to the trust, which are used to pay certificate holders. At the end of the repayment period, the railroad gains ownership of the equipment.
Construction equipment procurement. A construction firm requires a fleet of specialized machinery, such as cranes or earthmovers, for a long-term infrastructure project. The firm uses ETCs to finance the machinery purchase. The machinery is held in trust as collateral, and the firm makes regular payments to satisfy the terms of the certificates. Upon full repayment, the ownership of the machinery transfers to the construction firm.

Each example illustrates how ETCs are structured to secure financing for large capital expenditures while mitigating risk for lenders or investors.

Advantages of an Equipment Trust Certificate

Equipment trust certificates may be employed because of the associated tax benefit; because the borrower does not have title to the asset, the borrower does not pay property taxes on it until the associated debt has been paid off. This represents a substantial deferral of tax payments.