- to render null or void, or to terminate the interest in a property according to strictly stipulated conditions as in a deed. It may refer to the physical instrument itself stipulating the above conditions.
- to discharge old, low-rate debt (without repaying it before maturity) by adding new securities paying high interest or having a higher market value. The object is to have a more debt-free balance sheet and increased earnings by removing the old debt and adding highyielding new securities.
- Banking. A clause in a loan agreement, such as a mortgage, giving the borrower the right to redeem the title to property securing the debt when the loan is fully paid.
- Finance. A refinancing technique in which a bond issuer, instead of redeeming the bonds at the call date, continues to make coupon interest payments from an irrevocable trust and has deposited into the trust assets that will be used for repayment of principal at maturity. The cash flow from trust assets, ordinarily U.S. Treasury securities or zero-coupon securities, must be sufficient to service the bonds until the expected maturity. Defeasance effectively removes the bonds from the issuer’s balance sheets, even though the issuer continues to meet bond interest payments.
In mortgage banking defeasance allows a bond trustee to protect mortgage-backed bonds from early redemption, if the issuer fails to keep sufficient collateral or defaults. See also advance refunding.
instrument that negates the effectiveness of a deed or a will; collateral deed that defeats the force of another deed upon the performance of certain conditions. It is a technique used by corporations to avoid retiring low-interest-rate debt. Instead, they purchase U.S. Treasury bonds earning a higher rate and pledge the Treasury bonds as collateral against the debt they owe. The corporation can then disregard certain aspects of the indenture of their bond debt.
general: provision found in some debt agreements whereby the contract is nullified if specified acts are performed.
Corporate finance: short for in-substance defeasance, a technique whereby a corporation discharges old, low-rate debt without repaying it prior to maturity. The corporation uses newly purchased securities with a lower face value but paying higher interest or having a higher market value. The objective is a cleaner (more debt free) balance sheet and increased earnings in the amount by which the face amount of the old debt exceeds the cost of the new securities. The use of defeasance in modern corporate finance began in 1982 when Exxon bought and put in an irrevocable trust $312 million of U.S. government securities yielding 14% to provide for the repayment of principal and interest on $515 million of old debt paying 5.8% to 6.7% and maturing in 2009. Exxon removed the defeased debt from its balance sheet and added $132 million-the after-tax difference between $515 million and $312 million-to its earnings that quarter.
In another type of defeasance, a company instructs a broker to buy, for a fee, the outstanding portion of an old bond issue of the company. The broker then exchanges the bond issue for a new issue of the company’s stock with an equal market value. The broker subsequently sells the stock at a profit.
procedure that moves up the maturity date of the municipal bond to its call date. The call date permits the issuer of the bond to redeem the bond at any time after a stipulated minimum number of years have passed at a given price.
Example: Graham defaults on the balloon payment of the mortgage. Three days later she pays the balance in cash. The defeasance clause allows her to redeem the property. It overrides the provision that grants the property to the lender upon default.