Have you
ever wondered how airlines finance their purchase of aircrafts?
One of the
common routes used extensively by airlines to purchase an aircraft is via
Equipment Trust Certificate (ETC).
What is an
Equipment Trust Certificate (ETC)?
ETCs are
debt instruments issued for financing purchase of an asset in a manner which
facilitates the company to keep the possession of Asset for utilization while
paying for it over a time.
It is used
by companies for financing purchase of an asset (for airlines, it is aircrafts)
which requires heavy capital expenditure. It allows the company to use the
asset immediately while paying for it over a period of time.
Let us
understand, how?
A trust is
set up which issues debt certificates to investors and the fund raised through
these certificates is used by the trust to purchase the asset (here aircraft).
The
possession of asset (aircraft) is kept with the trust and then trust leases the
asset (aircraft) to the company (airline) for its utilization.
The lease
payments by the company (airline) to the trust will be utilized by the trust to
pay off the interest and principal obligations to the ETC investors.
At the end
of the tenure, after due payments are made, the trust transfers the title of
the asset (aircraft) to the company (airline).
This way
Airline was able to use the aircraft while paying for the aircraft over a
period of time.
?){kind=link}
Social Plugin