Equipment trust certificates

Equipment trust certificates (ETCs) are also secured (collateralized) bonds. If a corporation sells a bond backed by the equipment they own, they’ve issued ETCs. Collateral could include vehicles, construction equipment, or airplanes. For example, Delta Airlines sells bonds and pledges some of its airplanes as collateral. Interestingly enough, their bond ratings* have declined due to COVID-19’s effect on the value of airplanes.

*Bond ratings were covered in the bond fundamentals suitability chapter.

ETCs are typically sold in serial format due to the depreciation of the equipment backing the issue. In order to fully back an issue, the collateral must be worth at least the combined value of future interest and principal payments.

The equipment depreciates over time, so issuers of ETCs need to pay off their debt over time. By having their bonds mature at different times, the corporation can structure the bond in a way that aligns with the depreciation of the equipment.