2.8.2. Equipment Trust Certificates (ETCs)

Question 1

What are Equipment Trust Certificates?

Answer 1

They are secured bonds commonly issued by transportation companies.

Question 2

How do ETCs work?

Answer 2

If an airline wants to purchase a fleet of new planes, it uses the ETCs to finance the purchase. The trustee then sells the issue to investors and delivers the proceeds to the borrower, i.e. the airline.

Question 3

Expand on trsutee’s role in ETCs

Answer 3

The trustee holds the legal title to the fleet of planes which it leases to the airline until the bond is paid off. The trustee collects rent from the airline and sends the interest payments to the bondholders.

Question 4

Why are ETCs considered the safest of corporate bonds?

Answer 4

Because of the mortgages, equipment has a ready market and is easily transferable.

Question 5

What happens if the company defaults?

Answer 5

The trustee can lease the equipment to another company.

Question 6

Defaults on ETCs are more common during _______

Answer 6

Recessions