In a securitization, what is a revolving period?

Question

What will be an ideal response?

Answer 1

Typically when amortizing assets are securitized, the collateral is fixed over the life of the structure and all principal received by the trust is paid out to the bond classes. However, in the case of nonamortizing assets, for a period of time, referred to as the revolving period (or lockout period), all principal received is used to purchase new collateral. Hence, new assets are being added to the collateral, and this structure is referred to as a revolving structure.

After the revolving period, the principal received is distributed to the bond classes. For example, a credit card receivable is a nonamortizing asset and therefore has a revolving structure. During the lockout period the principal payments made by credit card borrowers comprising the pool are retained by the trustee and reinvested in additional receivables to maintain the size of the pool. The revolving period can vary from 18 months to 10 years. So, during the revolving period, the cash flow that is paid out to the bond classes is based on finance charges collected and fees. The revolving period is followed by the principal amortization period where the principal is no longer reinvested but paid to bond holders.