Excess spread

The maintenance of uniform flow distribution in fixed bed reactors is frequently a problem. Maldistribution leads to an excessive spread in the distribution of residence times with adverse effects on the reactor performance, particularly when consecutive reactions are involved. It may aggravate problems of hot-spot formation and lead to regions of the reactor where undesired reactions predominate. Disintegration or attrition of the catalyst may lead to or may aggravate flow distribution problems. 

This calibration is to be performed with 3 or more replicate samples. The volume of the solution delivered to the planchets should be between 1 mL and 100 X. (The volume used should allow the solution to remain within the location of the usual sample deposit, a radius of about 0.5 cm from the center of the planchet. If the volume used is too large, it will encourage excessive spreading on the planchet.) These samples are dried under a heat lamp. Then, the dried residue is fixed on the surface of the disk by gently flaming the disk over a Meeker burner flame. (Note A Meeker burner is different from a Bunsen burner in that it bums hotter and has a metal grid over the flame that causes the flame and heat from the burner to vibrate as the fuel burns.)... 

Although solutions are the most commonly used vehicles for topical ocular medications, ointments are also frequently used for application to the eye. When applied to the inferior conjimctival sac, ophthalmic ointments melt quickly, and the excess spreads out onto the lid margins, lashes, and skin of the lids, depending on the amount instilled and on the extent of lacrimation induced by any irritation.The ointment at the lid margins acts as a reservoir and enhances drug contact time. 

European RMBS transactions contain a combination of various features designed to protect investors from the impact of defaults on mortgages in the underlying collateral pool, including excess spread, reserve fund, and subordination of any lower priority notes. 

In European RMBS transactions, bonds are not generally written down when losses are incurred in the collateral pool. Instead, the losses are recorded in a principal deficiency ledger, which records the extent to which the balance outstanding on the notes exceeds the remaining assets. Usually, both excess spread and the reserve fund can be used to cover losses and so pay down the principal deficiency ledger. This mechanism is beneficial to holders of the lower-rated notes because the notes do not get written off immediately and any future excess spread will be used to cover the loss. 

The reserve fund consists of a cash amount that the issuer places on deposit at launch, which is available to cover any shortfalls in income and any principal losses during the life of a transaction. If the reserve fund is used, future excess spread will be retained until it is replenished up to its required balance. The required balance is usually a fixed monetary amount, but some transactions allow the reserve fund to amortise or even require it to increase depending on collateral performance. 

The cash flow waterfall encapsulates the subordination of the junior classes of notes. As all cash received is used to pay items on the senior notes first, this will inevitably mean that any loss that cannot be covered through trapping excess spread or from the reserve fund will result in a shortfall in the funds available to redeem the most junior class of notes. 

The effect of a switch from sequential to pro rata redemption will stop the gradual erosion of excess spread but this will be accompanied by a reduction in the rate of improvement in credit enhancement. 

The credit enhancement for a particular class of notes is the sum of all the credit support provided by the subordinated notes (if any), the reserve fund, and the protection provided by the excess spread. As the collateral is paid down and the notes redeemed, the credit enhancement for all classes of notes will improve. This steady improvement is the main reason behind the ratings upgrades in European RMBS. 

Exhibit 11.11 illustrates how the credit enhancement (excluding excess spread) improves during the life of a pass-through transaction. The exhibit corresponds to the generic paydown profile shown in Exhibit 11.9, and illustrates the reduced rate of improvement in credit enhancement once the notes are paying down on a pro rata basis. 

An asset performance trigger event would occur if a principal deficiency is recorded in the Class A Principal Deficiency Ledger. This means that the total balance of realised losses that have not been covered by either the reserve fund or with excess spread exceed the aggregate outstanding amount of the subordinate notes. If this occurs, all receipts on the mortgages will be allocated to the issuers and the seller on a pro rata basis. The notes will start to redeem early with all the Class A notes being redeemed on a pro rata basis. When all the Class A notes have been redeemed in full, the Class B notes would be redeemed, and so on for all other classes of notes until all the notes are redeemed or the trust no longer has any assets. 

Excess spread is available to build up the reserve fund to its required level and cover any principal deficiencies. For example, in the Holmes Financing transactions there is a mechanism whereby, if the yield on the mortgages falls below a certain specified level, excess spread will be trapped in a second reserve fund to provide additional credit enhancement as compensation for the reduction in excess spread. 

To date, the main reserve funds in master trust transactions have been standard fixed cash amounts that are available to the issuer to cover any shortfalls in income or principal losses during the life of the transaction. The reserve funds are built up to their required levels through trapped excess spread. 

If any losses are realised on loans in the collateral pool, they will be covered by trapping any excess cash flowing through the cash flow waterfall, so the size of excess spread relative to the losses being incurred is an important indication of the transaction s financial health. In the Holmes Financing master trust, excess spread is measured on a quarterly basis. Exhibit 11.17 shows it that has been averaging around 60 bps per year, massively exceeding the 0.5 bp loss rate. 

EHHIT 11.17 Excess Spread in Holmes Financing Transaction (% pa.)... 

Three-month average excess spread falls below zero. 

The class C noteholders benefit from a dynamic spread account. If 3-month average excess spread falls below a predetermined level, the spread account builds from monthly excess spread until the target level is reached. In order to fully understand the protection afforded by the spread account we need to assess the degree to which the spread account traps excess spread. Exhibit 13.10 shows excess spread trigger levels and trapping levels for a typical credit card issue. 

Excess Spread (3-month average) Excess Spread Trapped Up to... 

EXHIBIT 18.11 Trapped Excess Spread (Slowly Deteriorating Environment, %)... 

In the following example, the spread account starts to trap excess spread when the 3-month average excess spread level is 5% or lower. As the excess spread level continues to decrease, the level of spread that is trapped increases to a maximum of 5% of the total transaction size. 

As the spread account traps excess spread over a period of deteriorating collateral performance, a driving factor in the effectiveness of the spread account is the rate at which the excess spread decreases. If the collateral performance deteriorates slowly, the spread trapping mechanism will most likely be able to trap the maximum amount of spread allowed. However, if there is a rapid deterioration in the collateral performance, the spread trapping mechanism may not be able to trap the maximum allowable amount of spread before the excess spread in the transaction turns negative. Exhibit 13.11 shows a scenario in which excess spread deteriorates from an initial level of 9% to zero over a 36-month period. After 12 months, 3-month average excess spread falls to 5% and excess spread is getting trapped. 

In this example, the dynamic spread account builds up to the maximum 5% of the transaction size. The spread account reaches the maximum of 5% in month 33 and then stays at this level. Exhibit 13.12 shows a scenario in which excess spread falls from the initial 9% to zero within 24 months, that is, the same deterioration in excess spread as in the previous example happens over a 2- instead of a 3-year period. 

The key performance indicators for analysing credit card portfolios include portfolio yield, monthly payment rate (MPR), delinquencies, charge-offs, and excess spread. For most European credit card ABS, these performance indicators are published on a monthly basis on Bloomberg. The high degree of standardisation in terms of which performance indicators are published and how they are calculated makes the credit card ABS market very transparent. This also allows us to construct meaningful indices which help us track the performance of the whole (or a significant part) of the credit card market. 

We will discuss portfolio yield, monthly payment rate (MPR), delinquencies, charge-offs, and excess spread as well as excess spread efficiency (ESE) and charge-off coverage (COC) the latter two are combinations of the first five performance indicators. The various performance indicators will be shown for European and US credit card collateral. We will use our BECCI for European collateral and Standard Poor s Credit Card Quality Indexes (S P Index) for US collateral. 

Source Barclays Capital, Standard Poor s. 18.20 Excess Spread, Annualised... 

Excess spread is a particularly important measure of the health of a credit card portfolio and negative excess spread will usually trigger early amortisation. Excess spread is portfolio yield less servicing fees, note coupon, charge-offs, and other costs. Exhibit 13.20 shows 3-month average excess spread for European and US credit card collateral. 

Excess spread for European credit card collateral has traditionally been higher than excess spread for US collateral. This is due both to higher portfolio yield and significantly lower charge-offs in Europe. 

Excess spread is important because it is the first line of protection for noteholders in that it absorbs charge-offs. While this is true, two portfolios with similar levels of excess spread can behave very differently in a worsening economic environment. Exhibit 13.21 shows excess spread for two different credit card portfolios. 

Portfolio Yield MPR Charge- Offs Excess Spread Excess Spread Efficiency Charge-Off Coverage... 

However, we are introducing two ratios to help predict the severity of change in collateral performance with a worsening economic environment. The two ratios are excess spread efficiency (ESE) and charge-off coverage (COC). 

The ESE ratio is defined as excess spread divided by portfolio yield it measures the ability of the servicer to turn yield into excess spread. The greater the ratio, the smaller the predicted impact of a slowing economy on the performance of the collateral. As Exhibit 13.21 shows, the prime issuer (issuer 1) has a much higher ESE ratio than the subprime issuer. The September 2002 ratios for European and US credit card portfolios are 44% and 39%, respectively. 

For both Globaldrive B and PPAFl the first layer of protection is excess spread in the transaction, which is the difference between (1) the income received from the pool of receivables, and (2) the coupon due under the notes/payments due to the swap counterparty plus a certain servicing fee. Excess spread that is not used to cover losses on the loans within a certain period is returned to the originator (i.e., excess spread benefits the transaction on a use it or lose it basis). 

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