Defeased Securities

See: Defeasance.

The Hollywood Golden Age comedian Bob Hope once said, “A bank is a place that will lend you money if you can prove you don’t need it.” From a corporate or institutional perspective, issuers of defeased securities fit that bill. A defeased security is one where the issuer has already established set aside cash or other security amount in escrow to cover the entire issue’s principal and interest to maturity.

One might ask, “Why borrow if they already have the money?” The answer often has to do with having the extra capital on hand for flexibility in seizing financial or business opportunities, such as refinancing at a lower interest rate. Given that they are already collateral-backed, a defeased security is automatically a AAA-rated security and will likely have a smaller coupon to adjust for the lower risk.