defeasance

Defeasance

A provision that voids a bond or loan when the borrower sets aside cash or bonds sufficient enough to service the borrower's debt.

Also referred to as "defease."

Notes:

The borrower sets aside cash to pay off the bonds, therefore the outstanding debt and cash offset each other on the balance sheet and don't need to be recorded.

See also: Bond, Repayment

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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.