Who issues equipment trust certificates

Because the value of capital equipment depreciates over time, ETCs are issued serially so that the amount outstanding goes down year-to-year in line with the depreciating value of the collateral. ETCs are usually designed to mature well before the equipment backing them should wear out. This is to ensure that the amount borrowed is always less than the worth of the equipment, so this form of secured bond always remains secured.

LOGIN Search for:. Preparing for an Exam? Please wait SIE Exam. The payment obligations of the airline issuer under an Indenture may only be amended or modified with the consent of each affected promissory noteholder.

Each promissory note issued under an Indenture is issued to and in the name of the subordination agent acting for the related pass through trustee. Tracing through the chain of beneficial ownership of the PTCs, each holder of a beneficial interest in the PTCs would need to consent to the amendment of payment obligations in order for such an amendment to become effective, as further discussed below.

Of note, the PTC holders have a right to receive periodic distributions of payments from the trust property which includes payments received on the promissory notes , which payment cannot be impaired or affected without the consent of each of the affected PTC holders.

With respect to the particulars of the identity of the holders of the PTCs, the issuance mechanism largely shields their identities from the airline issuer. The DTC participants are solely responsible for keeping account of their holdings on behalf of their customers. It is not possible for a pass through trustee to determine the identities of the beneficial interest holders.

Although the pass through trustee can request a DTC position listing that will provide a snapshot as to which DTC participants hold beneficial interests in the PTCs as of a particular date and time, the DTC position listing will not reveal the identities of the ultimate beneficial interest holders.

Additionally, as with all securities sold in the capital markets, the actual investors of any particular EETC issuance may change from day to day as a result of secondary trading in the securities.

Intercreditor Agreements utilized in EETCs provide, among other functions, the payment waterfalls for distributions and, most pertinent to the present discussion, the control of remedies in the case of a default by the airline issuer. In the case of a default by the airline issuer, it is a majority of the holders of the PTCs of the most senior class who dictate the exercise of remedies.

We should also note that airline issuers seeking debt relief might also seek a forbearance agreement from the PTC holders of its EETC — that is, an agreement from the investors not to exercise remedies against the aircraft collateral or the airline issuer for a prescribed period. While a smaller group for this purpose is required i.

The lack of visibility of PTC holders for the airline issuer seeking an amendment or forbearance in a EETC context further complicates the process for seeking such an amendment or forbearance in contrast to what would happen in a private deal. This is because when an airline seeking debt relief goes out to its creditors seeking concessions, it typically follows up with phone calls and in-person meetings with the creditors to explain why its request is appropriate and reasonable, and seeks to pressure the creditors with cajoling rhetoric and personal pleas.

Accordingly, this lack of visibility presents a structural impediment in obtaining debt relief. Even if an airline issuer can identify all affected PTC holders to effect an amendment to the payment terms or the holders of a majority of the most senior class to effect a forbearance , there is little incentive for any PTC holder to grant its consent.

The following reasons create such disincentives:. Because the aircraft in a EETC financing are cross-defaulted and cross-collateralized, if an airline issuer defaults under any of the promissory notes for any tranche, the subordination agent is permitted to exercise remedies under all the promissory notes related to all of the aircraft financed with that particular EETC transaction.

Bankruptcy Code or the Cape Town Convention, as applicable. Finally, even if an airline went into bankruptcy and was of the mindset to substantially reduce its fleet, the airline may be reluctant to voluntarily default under a EETC issuance because it may not want to impair the EETC product for its own future use. EETCs are a very attractive form of financing to airlines.

Airlines enjoy pricing advantages on the senior-most tranches of a EETC because of their investment grade credit rating, thanks to the structural enhancements previously discussed. A bankrupt airline might be cautious to take any action that could diminish that source of capital by harming the market reputation of EETCs and therefore potentially diminishing investor appetite or rating agency views of the product. Having set forth how difficult it may be for an airline to amend payment provisions under EETC documentation or obtain forbearance relief, as well as the considerations that might affect investor incentives to give consent, one can now see why, despite this unprecedented occasion with material threat of bankruptcy for many airlines, an airline would not seek relief under a EETC by seeking to modify the payment terms or seeking a forbearance, unlike in a private debt context.

Even if an airline files for bankruptcy, that airline would have multiple reasons compelling it to continue to perform under its EETCs. Scheinberg concentrates his practice in corporate finance with a special focus on aircraft and rail finance. He represents commercial banks, lessors, finance companies, underwriters, investment banks, insurance companies, manufacturers and airlines in aircraft, railcar and other equipment financing and portfolio acquisitions.

He handles He primarily advises clients on capital markets transactions and securities law matters. These certificates were originally used to finance railway box-cars and rolling stock, with the box-cars used as collateral. Nowadays, equipment trust certificates are used to finance aircraft purchases and containers used for shipping and offshore businesses.

ETCs are a popular way of financing equipment because of the tax advantages associated with them. Since the borrower doesn't hold title to the asset during the financing period, it isn't considered the owner. This means it won't have to pay taxes on it, at least until the debt is paid off in full. An enhanced equipment trust certificate EETC is one form of ETC that is issued and managed through special purpose vehicles known as pass-through trusts.

These special purpose vehicles SPEs allow borrowers to aggregate multiple equipment purchases into one debt security. While the borrower leases the assets from the trust, the trust issues the debt, acts as a repository for it, while handling debt service and payments to investors who hold the certificate.

Airlines commonly use EETCs very often, raising billions in financing for their aircraft purchases because of their high capital spending requirements.

In return for greater liquidity and a broader investor base for these financial instruments, airlines enjoy cost savings and greater flexibility by avoiding the need to structure multiple ETCs for individual aircraft purchases.

EETCs were further enhanced when tranches—or different slices of debt with different levels of seniority, security, risks, coupons, and credit ratings—were introduced. By using SPEs, borrowers are able to keep their debt obligations as items off their balance sheets, with the result that their financial statements often do not present a complete picture of their borrowings.

FASB issued Financial Interpretation Notice FIN 46 to outline when companies should consolidate or show off-balance sheet assets and liabilities on their financial statements for these vehicles. As mentioned above, there are tax benefits for lessees that use ETCs as a way to attain the assets they need to run their operations. Because they don't own the asset, lessees aren't required to pay any property taxes. That may change, though, once the title is transferred from the trust to the lessee.

ETCs also provide some form of protection to the trust and investors. If a company goes bankrupt or insolvent, it may default on its financial obligation. But in the case of an ETC, the trust has the right to reclaim the asset. In other words, if an airline company goes belly up and still has payments to make, the trust can take back the planes it leased to the company. American Bar Association. Accessed June 22,