Legal Definitions - trust certificate

A trust certificate is commonly used as a shorthand term for an equipment trust certificate. It is a specialized financial security primarily designed to finance the acquisition of expensive, movable assets.

In this arrangement, a trust is established, and investors purchase these certificates, providing the necessary capital. A trustee, typically a financial institution, holds legal title to the asset (such as an airplane, a fleet of railcars, or a cargo ship) on behalf of the investors. The company that will use the asset (the "lessee" or "user") makes periodic payments to the trustee, which include both principal and interest. These payments are then distributed to the certificate holders (the investors).

Once all scheduled payments have been made, legal title to the asset is transferred from the trustee to the company that has been using it. This structure offers a significant advantage to investors because the asset itself serves as collateral, providing security in case the user defaults on payments.

• Example 1: Airline Fleet Expansion

  A major airline decides to purchase several new, state-of-the-art passenger jets to modernize its fleet. Instead of securing a traditional bank loan for the entire multi-billion dollar cost, the airline issues trust certificates to a consortium of investors. A bank is appointed as the trustee, which then holds legal title to the new aircraft. The investors provide the funds by purchasing these certificates. The airline operates the new jets, generating revenue, and makes regular payments to the trustee. These payments are subsequently distributed to the certificate holders. Once the full payment schedule is completed, the trustee transfers the legal ownership of the aircraft to the airline.

  This example illustrates how trust certificates enable the airline to acquire high-value assets without immediate full ownership, while providing security to investors through the trustee's holding of title until the debt is fully repaid.

• Example 2: Freight Railcar Acquisition

  A national freight railroad company plans to significantly expand its capacity by acquiring a large number of new, specialized railcars for transporting goods across the country. To finance this substantial investment, the railroad issues trust certificates. Investors purchase these certificates, and a financial institution acts as the trustee, holding legal title to the new railcars. The railroad company uses the railcars in its operations, earning freight revenue, and makes scheduled payments to the trustee. These payments are then passed on to the certificate holders. Upon the final payment, the trustee releases its title, and the railroad gains full ownership of the railcars.

  Here, the trust certificate mechanism allows the railroad to finance its rolling stock, with the railcars themselves serving as collateral, making the investment attractive to certificate holders due to the secured nature of the debt.

• Example 3: Maritime Shipping Vessel Construction

  A global shipping company commissions the construction of a new, large container ship to enhance its international shipping routes. To fund this multi-million dollar project, the company opts to issue trust certificates. Investors provide the capital by purchasing these certificates, and a designated trustee holds legal title to the newly built ship. The shipping company operates the vessel, earning revenue from cargo transport, and makes regular payments to the trustee. These payments are then distributed to the investors. Once the complete payment schedule is fulfilled, the trustee transfers the ship's title to the shipping company.

  This example demonstrates the use of trust certificates for financing a substantial maritime asset, where the ship itself is the underlying collateral, providing security for the investors who hold the certificates.