Written by:
Image
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades.

Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

View all posts
Updated September 30, 2020

What is Unencumbered?

An encumbrance is a limitation on the ownership of a property. When an asset is unencumbered, there are no limitations on its ownership.

How Does Unencumbered Work?

To understand what unencumbered means, it's important to understand how encumbrances 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 issue by Company XYZ. If 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 will be paid on time, then the bonds would be considered securitized or asset-backed, because the assets have $100 million of encumbrances on them.
 

Why Does Unencumbered Matter?

Encumbrances provide security to lenders and bond investors in the case of bankruptcy or default. For example, it is important to note that debentures 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 earnings of the issuer. Therefore, if the issuer were to liquidate, the holders of the debenture bonds 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 bond issue 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 bonds with encumbrances from less creditworthy issuers.) Sometimes issuers also want to leave their assets unencumbered in order to make future financings possible.

Ask an Expert about Unencumbered
At InvestingAnswers, all of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Unencumbered.
Be the first to ask a question

If you have a question about Unencumbered, then please ask Paul.

Ask a question

Read this next

Don't Know a Financial Term?
Search our library of 4,000+ terms
 - profile
Ask an Expert about Unencumbered

By submitting this form you agree with our Privacy Policy

Share
close