defeasance

Defeasance

The setting aside by a borrower of cash or bonds sufficient to service the borrower's debt. Both the borrower's debt and the offsetting cash or bonds are removed from the balance sheet. In securities trading, where a clearing house becomes counterparty to each side of a trade, after the trade has been agreed. This is necessary to facilitate netting, and reduce counterparty risk exposure. The term has become popular recently, because of the growth of central counterparty clearing services in European cash equities markets.

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defeasance

The extinguishment of debt. While defeasance technically refers to extinguishment by any method (for example, by payment to the creditor), in practice it is generally used to mean discharging debt by presenting a portfolio of securities (usually, Treasury obligations) to a trustee who will use the cash flow to service the old debt. This procedure permits the firm to wipe the debt off its financial statements and to show extra income equal to the difference between the old debt and the smaller, new debt. Also called in-substance debt defeasance.

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Defeasance

1. A provision in a loan or bond removing it as a liability on a balance sheet if cash or a portfolio is set aside for debt service. Usually defeasance occurs when a borrower owns a portfolio of Treasury securities, the coupons of which are used to service a debt. When the borrower has set aside sufficient assets to cover the debt, the debt does not need to be recorded on a balance sheet.

2. More broadly, a provision in an agreement voiding the agreement under certain defined circumstances.

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defeasance

The process of legal title being transferred back to a borrower once all payments and other requirements in a mortgage loan have been completed.