Equipment trust certificate
Also known as: ETC, equipment trust bond
An equipment trust certificate is a secured corporate bond backed by specific physical equipment, such as airplanes or railroad cars. A trustee holds title to the equipment until the debt is fully repaid.
An equipment trust certificate (ETC) is a form of secured corporate debt used to finance large, movable equipment — classically railroad rolling stock, and today airplanes, ships, and truck fleets. The issuing company gets use of the equipment immediately, while a trustee holds legal title on behalf of the certificate holders. Only when the final payment is made does title transfer to the company.
The structure works much like an installment purchase. An airline financing new aircraft, for example, issues certificates that investors buy; the airline makes regular payments of principal and interest, and the trustee releases title once the certificates are retired. ETCs are typically issued in serial maturities, with portions of the principal maturing at regular intervals, usually timed so the debt is paid down faster than the equipment depreciates.
Because the debt is collateralized by tangible assets that can be repossessed and sold if the issuer defaults, equipment trust certificates are considered among the safer corporate bonds — safer than debentures, which are backed only by the issuer's promise to pay. Transportation companies with substantial equipment needs are the classic issuers.
The SIE, Series 6, and Series 7 exams all cover equipment trust certificates within their corporate debt material. Know that ETCs are secured by equipment (not real estate — that's a mortgage bond), that a trustee holds title until maturity, and that secured bonds rank above debentures and subordinated debentures in a liquidation.
Key takeaways
- Equipment trust certificates are corporate bonds secured by specific equipment like aircraft or railcars.
- A trustee holds title to the equipment until the certificates are fully repaid.
- Serial maturities typically retire the debt faster than the equipment depreciates.
- As secured debt, ETCs are safer than debentures and rank ahead of them in a liquidation.
- Exams pair ETCs with mortgage bonds and collateral trust certificates as the main types of secured corporate debt.