Principal payments, collection

Exhibit 11.18 shows the principal payment rate is somewhat erratic on a monthly basis but has generally been increasing. However, with a collateral pool of 24 billion and principal collections running at their average rate of 4%, it would take less than one month to accumulate the principal required to redeem the largest outstanding note. 

Strictly speaking, the FIAT 1 transaction does not generate excess spread. This explains the high level of credit enhancement from the unrated class M notes (usually, unrated tranches are either privately sold or kept as an equity tranche by the originator). On the closing date, an amount of notes was issued which was equal to the net present value of all future cash payments due from the collateral (as opposed to the principal balance of the collateral). The discount rate used was the fixed rate payable to the swap counterparty (swap rate plus coupon on the class A notes and all fees associated with the transaction). Structured this way, the receivables always yield the discount rate, leaving no excess spread in the transaction. However, losses on the FIAT 1 portfolio can be covered to a certain degree from interest collections because the structure provides for delinquent principal and defaults to be covered before interest is paid on the class M notes. 

There are some concerns when relying on the TIE ratio. Companies have other debts to pay beyond paying interest payments, such as loan principal and bond payments. In addition, EBIT does not coincide with cash flow. Revenue may have been earned and recognized thus increasing EBIT, but the company may not have collected any cash yet. Even though, cash is needed to pay debts and interest. Considering these concerns, an alternative ratio to consider is the debt service coverage ratio. 

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