Defeasance

Defeasance is a financial transaction in which a company or other entity uses one or more assets to pay off a debt obligation. This can be done in a number of ways, but the most common is for the company to purchase a bond that is equal to the amount of the debt. The bond is then held in a trust, and the interest payments on the bond are used to pay off the debt.

Defeasance can be used to improve a company's financial statements. By removing a debt from its balance sheet, the company can make itself look more financially healthy. This can make it more attractive to investors and lenders, and can lead to lower interest rates on future borrowing.

There are a number of risks associated with defeasance. One risk is that the value of the assets used to defease the debt may decline. This could make it difficult for the company to make the interest payments on the bond, and could even lead to default. Another risk is that the company may not be able to sell the bond at a price that is high enough to cover the cost of the debt. This could also lead to default.

Defeasance is a complex financial transaction, and it is important to understand the risks involved before entering into one. If a company is considering defeasance, it should consult with a financial advisor to make sure that it is the right decision for its situation.

In addition to the above, defeasance can also be used to restructure a debt obligation. For example, a company may use defeasance to convert a variable-rate debt obligation into a fixed-rate debt obligation. This can be done by purchasing a bond that has a fixed interest rate that is equal to the current interest rate on the variable-rate debt. The bond is then held in a trust, and the interest payments on the bond are used to pay off the variable-rate debt.

Defeasance can also be used to extend the maturity date of a debt obligation. For example, a company may use defeasance to convert a 10-year debt obligation into a 20-year debt obligation. This can be done by purchasing a bond that has a 20-year maturity date that is equal to the amount of the 10-year debt. The bond is then held in a trust, and the interest payments on the bond are used to pay off the 10-year debt.

Defeasance can be a useful tool for companies that want to improve their financial statements or restructure their debt obligations. However, it is important to understand the risks involved before entering into a defeasance transaction.