Legal Definitions - equipment trust certificate

An equipment trust certificate is a specialized type of financial security that companies use to finance the purchase of expensive, movable assets like aircraft, ships, or heavy machinery. When a company issues these certificates, investors provide funds to buy the equipment. To protect these investors, a neutral third party, called a trustee, holds the legal title to the equipment. The company using the equipment makes regular payments, and once all payments are completed, the trustee transfers the legal title of the equipment to the company. This arrangement provides a strong layer of security for investors, as the equipment itself serves as collateral for the loan.

Here are some examples of how equipment trust certificates are used:

• Airline purchasing new aircraft: Imagine a major airline wants to expand its fleet by acquiring several new passenger jets, each costing hundreds of millions of dollars. Instead of taking out a traditional bank loan or issuing general corporate bonds, the airline issues equipment trust certificates. Investors purchase these certificates, providing the capital for the new planes. A trustee holds the legal title to these aircraft. As the airline makes its scheduled payments to the certificate holders, it uses the planes for its operations. Once all payments are made, the trustee transfers full ownership of the aircraft to the airline. This structure assures investors that if the airline defaults, the trustee can seize and sell the aircraft to recover their investment.

• Shipping company acquiring new cargo vessels: A global shipping company needs to modernize its fleet by adding several large container ships to meet increasing demand for international trade. The shipping company decides to finance these multi-million dollar vessels through equipment trust certificates. Investors buy these certificates, funding the purchase of the ships. A designated trustee legally owns the new ships until the shipping company has fully repaid the investors through regular installments. This arrangement allows the shipping company to operate the vessels immediately while providing investors with confidence, knowing that the valuable ships are held in trust as collateral for their investment.

• Construction firm buying heavy machinery: A large construction firm wins several new contracts and needs to acquire a significant number of new bulldozers, excavators, and cranes, representing a substantial capital outlay. To finance this acquisition, the construction firm issues equipment trust certificates. Investors provide the necessary funds, and in return, a trustee holds the legal title to all the new heavy machinery. The construction firm uses the equipment on its projects while making periodic payments to the certificate holders. Upon the final payment, the trustee transfers the legal ownership of the machinery to the construction firm. This method allows the firm to acquire essential assets without tying up its own capital, while investors are protected by the tangible assets held in trust.