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Equipment Trust Certificates

Equipment trust certificates are usually issued by corporations that derive most of their value from the equipment they employ in their business, such as railroads, airlines, trucking companies and oil companies. In these cases, there may be as much value or more in the company's capital equipment (e.g., aircraft, trucks, and oil rigs) as there is in the company's real estate holdings or securities portfolio.

Equipment trust certificates, or ETCs, are often collateralized by the very equipment that they are being used to purchase. Because the value of capital equipment depreciates over time, ETCs are issued serially so that the amount outstanding goes down year-to-year in line with the depreciating value of the collateral.

ETCs are usually designed to mature well before the equipment backing them should wear out. This is to ensure that the amount borrowed is always less than the worth of the equipment, so this form of secured bond always remains secured. It's unforturnately easy to over-estimate the durability of valuable equipment, so this standard is not always upheld.

A trustee for the bondholders, usually a bank, keeps titles to the equipment until all the bondholders have been paid back, and then returns the title to the company. At this point a company will usually sell off the near-worthless equipment and issue new Equipment trust certificates to purchase state-of-the-art replacements.

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