Equipment trust certificates (ETCs) are secured (collateralized) bonds. When a corporation issues bonds and pledges equipment it owns as collateral, it’s issuing ETCs. The collateral can include vehicles, construction equipment, or airplanes. For example, Delta Airlines has issued bonds backed by some of its airplanes. Their bond ratings* have declined due to COVID-19’s effect on airplane values.
*Bond ratings were covered in the bond fundamentals suitability chapter.
ETCs are typically sold in serial format because the equipment backing the issue depreciates over time. To fully back the issue, the collateral must be worth at least the combined value of all future interest and principal payments.
Because the equipment loses value over time, ETC issuers usually pay down the debt over time as well. By structuring the bonds to mature at different dates, the corporation can better match the repayment schedule to the equipment’s depreciation.
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