What is the role of the early amortization provision in a credit card receivable-backed security structure?
What will be an ideal response?
The role of an early amortization provision in a credit card receivable-backed security structure is to provide a safeguard to protect the claims of those who purchase credit card receivable-backed securities. More details are supplied below.
There are provisions in credit card receivable-backed securities that require earlier amortization of the principal if certain events occur. Such provisions, which are referred to as early or rapid amortization, are included to safeguard the credit quality of the issue. The only way that the cash flows can be altered is by triggering the early amortization provision.
Early amortization is invoked if the trust is not able to generate sufficient income to cover the investor coupon and the servicing fee. For example, in the Sears Credit Account Master Trust II, Series 1995–4, if the net yield provided by the portfolio of receivables is less than the base rate for three monthly periods, early amortization is triggered. Other events that may trigger early amortization are the default of the servicer, credit support decline below a specified level, or the issuer violating agreements regarding pooling and servicing.
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