What it is:
An asset is unencumbered, there are no limitations on its ownership.is a limitation on the ownership of a property. When an
How it works/Example:
To understand what unencumbered means, it's important to understand how real estate world, an is similar to a lien. The bond world also includes encumbrances. For instance, let’s consider a $100 million bond by Company XYZ. If Company XYZ is willing to pledge $100 million of its assets to the (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, then the would be considered securitized or asset-backed, because the assets have $100 million of encumbrances on them.
Why it matters:
bankruptcy or default. For example, it is important to that debentures do not have — that is, they are not secured by specific pieces of property or and they do have a general claim on the assets and of the . Therefore, if the issuer were to , the holders of the debenture have a claim on any assets not specifically pledged to secure other debt. Unencumbered assets can therefore help reduce the risk of debt if they become encumbered.
Companies that are extremely creditworthy often have no reason to encumber specific assets in order to sell a because they’ll still pay relatively low interest rates. (This is why debentures, which do not have encumbered assets attached, can sometimes sell for more than with encumbrances from less creditworthy issuers.) Sometimes issuers also want to leave their assets unencumbered in order to make future financings possible.