What is Encumbrance?
An encumbrance is a limitation on the ownership of a property.
How Does Encumbrance Work?
In the real estate world, an encumbrance is similar to a lien. The bond world also includes encumbrances. For instance, let's consider a $100 million bond by Company XYZ. Let's say that Company XYZ is willing to pledge $100 million of its assets to the bondholders (that is, let the bondholders place liens on specific assets that they may seize in the event of default), giving them a little extra assurance that they be paid on time. In that case, the would be considered securitized or asset-backed because the assets have $100 million of encumbrances on them.
Why Does Encumbrance Matter?
Encumbrances provide security to bankruptcy or default. For example, it is important to that debentures ( backed by the full faith and of the ) do not have encumbrances. That is, they are not secured by specific pieces of property or collateral and they do have a general claim on the assets and of the . Therefore, if the were to liquidate, the holders of the debenture have a claim on any assets not specifically pledged to secure other debt.and investors in the case of
Companies that are extremely creditworthy often have no reason to encumber specific assets in order to sell a unencumbered in order to make future financings possible.because they'll still pay relatively low interest rates. (This is why debentures can sometimes sell for more than with encumbrances from less creditworthy issuers.) Sometimes also want to leave their assets