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This means that the trust owned the asset (i.e., the aircraft) and leased it to a company (i.e., the airline).
Certificates were issued by a bankruptcy-remote trust to investors, who, in turn, received lease payments from the company (or lessee – the airline) until the certificate’s maturity.
In addition, they may be considered attractive investments in the current low interest rate environment where investors are seeking alternatives to achieve higher yields.
CTLs and ETCs typically have higher interest rates than conventional bonds (such as U. Treasuries or corporate debt) because they are structurally more complex investments—they are structured for the most part as indirect obligations, and they are reliant on underlying leases for debt service payments.
A credit tenant loan (CTL or credit tenant lease, sale-leaseback) is a real estate loan that is secured by the obligation of a single (usually investment grade) company to pay debt service by means of rental payments under a lease, where real estate is pledged as collateral.
In other words, a CTL is a mortgage loan made primarily on reliance of the credit standing of a tenant (through the assignment of lease rental payments to the note or certificate holders) rather than based on the characteristics of the mortgaged property (such as its property value).
According to NAIC data, the largest five lessees or tenants of CTLs are listed in the table below, and they accounted for 61% of total U. Prior to 2011, CTLs were mostly reported, along with many other loan-backed and structured securities, among corporate bonds for valuation and reporting purposes.
They are a financing vehicle used mostly by railroad companies and airlines to finance their core operating equipment.As a result, these latter structure-types are not treated as bonds by insurers for regulatory purposes; rather, they are reported as mortgage loans. The underlying credit or tenant ability to pay rent is the primary underwriting consideration; that is, the primary credit risk of a CTL is the creditworthiness of the lessee/tenant rather than (fundamental) real estate analysis.Note that the lessee is only directly responsible for the lease payments and not directly responsible for payments of principal and interest.And, rather than one certificate, there are two or more classes of securities issued by the trust which have different payment priorities and asset claims, in accordance with inter-creditor agreements.Since the EETC structure emerged, financing for aircraft has predominantly utilized this assembly, while railroads continue to primarily utilize ETCs as a financing source. With EETC structures, the senior certificates (those with the highest payment priority)—as in those which are labeled in the diagram above—have a higher credit rating because they are supported by more credit enhancement than the subordinated certificates (i.e., the Class B and Class C Certificates).
These subordinated certificates represent the first-loss risk.