Finance: What is Defeasance?

What is Defeasance? Defeasance is the process by which a borrower accumulates cash or other liquid assets sufficient to retire significant portions if not the entirety of outstanding debt obligations that amount to a wash on the company’s balance sheet. This allows the debt to be effectively paid off without incurring prepayment penalties.

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Transcript

00:28

when the Louis comes by or some of the guys but work has been slow so we had to

00:33

take out a mortgage yeah a million bucks and well you know he wanted a nice man

00:37

cave although Batman still rules the roost in

00:40

that department but we're not gonna go there [Batman in a cave]

00:42

anyway the mortgage cost 6% a year what he had bad credit all those buildings

00:47

Superman wrecked yes someone's gonna pay for him right so the million bucks cost

00:50

60 grand a year to rent and that rent well it kind of stresses him out he

00:55

wants to not have to worry you know so what does he do well he buys bonds yeah

01:01

Superman buying bonds he had some extra cash left over from well when the city

01:05

of Metropolis rewarded him financially for you know reversing time to save that [Earth spinning]

01:10

busload of kids in fact he had 800 grand just sitting around and the bonds he

01:15

bought had a yield of 7% or said another way he collected rent on his eight

01:21

hundred grand of 56k a year and that helped a ton because that 56k covered

01:28

almost all of the 60k he had to pay on his mortgage and note that Superman just

01:34

cuz he's you know Superman he didn't pay any taxes so gross is net here people so

01:39

said another way soup here defeased all but four grand of his mortgage

01:44

obligation in buying those bonds which offset his monthly cash costs and why

01:50

wouldn't he have just paid off the mortgage well for this story there's a

01:54

prepayment penalty meaning he's not allowed to pay off early without all

01:58

kinds of cash penalties you know in the bank loaned him the money they wanted to

02:02

be certain to get the minimum amount of interest payments over the shortest

02:06

possible time period you know to make up for all that perceived risk [Superman cartoon moving steel gurder]

02:09

considering all the high-powered enemies he's you know facing all the time

02:13

because yeah when it comes to risk it's a you know kind of Superman's kryptonite [Superman screaming]