A pledge reduces creditor risk: in case of non-performance of the obligation, the creditor can enforce a claim against the pledged asset and recover their claims with priority over other creditors. Pledged assets typically include real estate, vehicles, equipment, inventory, and securities.
The presence of collateral usually means a lower interest rate for the borrower—creditor risk is reduced. However, it limits the use of the property: a pledged asset cannot be freely sold, and there is a risk of its loss in case of default.
In bond issuances, a pledge or other security improves the expected recovery rate in case of default. However, this does not eliminate risk: what matters is what exactly is pledged, how it is valued, and how quickly it can be liquidated. Illiquid or overvalued collateral provides less protection than the wording of offering documents may suggest.
When analyzing a secured issuance, one should verify the composition of collateral, the enforcement procedure, and the existence of other creditors with claims against the same assets.