Redemptions profile

To reach this minimum amount as soon as possible as well as to reduce the level of their liabilities, smoothen their debt s redemption profile or improve the liquidity of selected issues, many European Debt Agencies carry out bond exchange auctions and/or buybacks. These operations... 

Prepayments are the most important factor in determining the redemption profile of the notes in a pass-through transaction. The prepayment rate is usually measured as an annualised Conditional Prepayment Rate (CPR), which is defined as the proportion of the outstanding balance of the mortgages that is paid down ahead of schedule during the period. Exhibit 11.10 illustrates the paydown profile for the same example transaction as in Exhibit 11.9, but with an increased prepayment rate of 35% CPR. 

The variable pay term note (VPTN) structure was first introduced in automobile transactions in the United States. It was created to mitigate two features of the pass-through structure the long legal maturity of the notes even if they have a short average life, and the uncertainty in the redemption profile. 

The combination of this redemption profile with a substitution period and/or a cash accumulation account would allow the creation of bullet securities, although at the time of writing this has not been done for a European issuer. This is not the only way to create notes that expect to have a bullet redemption profile. In the Delphinus 2002-11 transaction, the substitution period extended up to the step-and-call date, so the notes are likely to be redeemed on that date. However, if for any reason the issuer is not able or willing to call the notes, they will redeem as in a standard pass-through transaction, and so the legal maturity is dependent on the term of the underlying mortgages. 

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. 

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. 

Even more sophisticated policies, which generate incentives for providers, are possible. Payments can be made to voucher distributors based on the number of target group patients treated, on the redemption rate they achieve with their vouchers, or on the socioeconomic profile of patients treated. 

EXHIBIT 11.9 Example Payd own Profile with Switch to Pro Rata Redemptions... 

A variety of credit-linked structures may be created to suit the various risk/reward profiles of investors. For example, some CLNs may protect the principal amount and credit events may only affect the interest cash flow from the CLN whereas others may link the redemption of principal to the performance of reference credit instruments. 

IDNs have a number of variations. Some pay a variable coupon and a fixed redemption amount others pay a fixed coupon and a redemption amount that is determined by the level or performance of a reference index. Still other IDNs have payoff profiles linked to the difference between interest rates in two specified currencies or between rates for two different maturities in one currency. 

---