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.

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.