defeasance investment & finance definition
- The
ability of a debtor to offset a liability by purchasing government securities
or a specialized risk management contract.
- Voiding a
contract or deed because a certain prohibited action has occurred.
See defeasance in Wall Street Words
The extinguishment of debt. While defeasance technically refers to extinguishment by any method (for example, by payment to the creditor), in practice it is generally used to mean discharging debt by presenting a portfolio of securities (usually, Treasury obligations) to a trustee who will use the cash flow to service the old debt. This procedure permits the firm to wipe the debt off its financial statements and to show extra income equal to the difference between the old debt and the smaller, new debt. Also called in-substance debt defeasance.
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