Master trusts

A master trust scheme is a scheme open to membership to the relevant employees of more than one employer, self-employed persons and persons with accrued benefits transferred from other schemes. This type of scheme is especially suitable for small and medium-sized companies. 

The structure of a mortgage master trust is essentially identical to a credit card master trust except that credit card receivables are replaced with mortgage collateral (see Exhibit 11.13). The originator sells an equitable interest in a specified group of mortgages to the master trust. This can then be used as collateral for a number of securitisations. Over time, additional mortgages may be added to the trust, subject to various constraints to protect the quality of the collateral. The same pool of mortgages will support all the series of notes issued by all issuers, with... 

Mortgage master trusts require the seller to maintain a certain minimum interest in the collateral pool held by the master trust. In credit card transactions this is used to absorb the monthly fluctuations in the balance outstanding on the credit cards and ensure there is always sufficient collateral to support the notes. In RMBS transactions the minimum seller s interest tends to be smaller as the mortgages have a more stable repayment profile, and this is primarily available to cover set-off risk in the event of originator insolvency. In existing transactions it is the minimum trust size rather than the minimum seller s share that has been the key constraint. 

The master trust structure gives originators a high degree of flexibility over the redemption profiles of the notes they can create. The emphasis has understandably been on creating bullet securities in order to attract investors who would prefer to invest in securities with traditional bullet redemption profiles and short legal maturities. There have also been notes with a scheduled redemption profile issued from master trust structures and, in practice, the redemption profiles that can be created will only be limited by the size of the trust, the length of the required accumulation period, and any other note redemptions that are due from the same trust. 

The master trusts have been recording prepayment rates that are higher than on more traditional RMBS transactions. This is because the... 

The optional redemption featnres of the master trust transactions are essentially the same as those for a pass-through transaction. The issuer typically has the option to call the notes for any of the following circumstances ... 

There are a number of performance triggers within the master trust transactions that serve to protect the senior noteholders against certain events. These events can be divided into two categories asset performance related and nonasset related. 

The credit enhancement in the master trust transaction is the sum of all the credit support provided by the subordinated notes (if any), the... 

The calculation of credit enhancement for notes in a master trust transaction seems more complicated than in a traditional pass-through transaction because subordinated notes from an earlier series are expected to be redeemed before the senior notes of later series. However, if the mortgages were to perform poorly, the trigger events ensure that all outstanding junior notes would only be repaid after all the senior notes. So the credit enhancement can be calculated as the aggregate balance of subordinate notes as a proportion of the total notes outstanding. 

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. 

A master trust allows an RMBS issuer to establish a sizeable securitisation programme, even with many series of notes secured through multiple SPVs, at a dramatically lower cost than through traditional separate securitisations. The ability to issue notes with a variety of maturities and redemption profiles allows the issuer to expand the available investor base and to tap into specific demand in the market. However, this process does rely on economies of scale and so is probably not the ideal form of securitisation for a smaller lender. Also, the requirement to maintain a minimum seller s share in the trust would make this type of structure less suitable than others for lenders wishing to securitise 100% of their balance sheet. 

Losses in master trust mortgage transactions can be recorded as an annualised charge-off rate in a similar manner to the standard method in credit card transactions. However, losses on prime mortgages are generally very small and intermittent so this measure will tend to be relatively volatile. The results for the Holmes Financing transaction provide a good illnstra-tion of this point (see Exhibit 11.16). 

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. 

The master trust transactions are largely insensitive to prepayment rates. The only requirement is that the principal receipts in the trust are sufficient for it to accumulate the bullet payments to meet the scheduled redemption dates. The principal payment rate, measured as the proportion of collateral redeemed or repurchased, has been running at an average rate of 4% per month. 

Since the market s inception in 1995, MBNA EBL has been the dominant issuer of CCABS, both in number of issues completed and total volume of issuance. The company has accessed the securitisation market each year and completed 16 transactions in total. The first 12 transactions, Chester Asset Receivables Dealings (CARDS) 1-12, were issued from the same master trust (MBNA MT 1), which was set up in 1995. In 2001, MBNA EBL created a new master trust UK Receivables Trust 11 (MBNA MT 2) from which four transactions, CARDS 2001-A, CARDS 2001-B, CARDS 2002-A and CARDS 2002-B, were issued in 2001 and 2002. 

The second largest issuer of European CCABS, The Royal Bank of Scotland PLC (RBS), has accessed the securitisation market three times in 2000. Every transaction from its ARRAN master trust has been denomi-... 

In the United States, standalone trusts were the dominant issuance vehicles from 1987 to 1991. An originator designates a specific pool of credit card accounts and sells the receivables and rights to the future receivables arising from those accounts to a discrete trust. The major disadvantage with standalone trusts is that each subsequent securitisation requires the issuer to set up a new trust. This structure was used until 1991 when the master trust became the preferred issuance vehicle. 

Master trusts allow issuers to sell multiple securities from a single trust. There is no segregation of any sort between the receivables in the trust and as such, all issues are backed by the same collateral. The master trust structure affords the issuer great flexibility, since the cost and effort associated with issuing a new series from a master trust is lower than for creating a new trust for every issue. For example, an issuer creates a new master trust and sells 100 million in credit card receivables from selected accounts into the master trust and then issues securities backed by these receivables. When more financing is needed, the issuer sells a further 100 million in receivables from more accounts into the same trust and issues more securities. This means that the issuer does not have to set up new master trusts if it wants to securitise new receivables. All securities are issued from the same master trust and backed by the same collateral. 

A simplified credit card master trust structure is shown in Exhibit 13.6. This particular structure has been developed in the United States and was introduced in Europe with the creation of MBNA s UK Receivables Trust II. 

As Exhibit 13.14 shows, yields have fluctuated on a month-on-month basis, both in Europe and in the United States, owing to the different number of days available for collection each month. For example, there was an extra bank holiday in June 2002 in the United Kingdom for the Queen s Jubilee Celebration. As more than 90% of European credit card trusts hold solely UK collateral, the reduced number of collection days in June had a significant impact on our European performance indicators. Cash collections for the master trusts fell by more than a fifth in June with a direct knock-on effect of reducing portfolio yield by almost 20%. 

Exhibit 14.6 below shows the structural diagram for a typical auto or consumer loan ABS transaction. Although there have been attempts to create a master-trust like structure for consumer loan ABS, we discuss in this chapter the most common structure used for auto and consumer loan ABS issuance. ... 

For example, the Master Noria transactions are issued from a master-trust type structure. The transactions, backed by unsecured consumer loans, use the concept of an FCC (Fonds Commun de Creances), which may issue different series over time. Master Noria may acquire new eligible loans using both funds from the amortisation of its assets and proceeds from future series issuance. 

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