medium · Asset-Backed Securities asset-nuances
A credit card master trust uses a 'two-pocket' monthly collection system.
If the 'Finance Charge' pocket is insufficient to cover bond interest, servicing fees, and charge-offs, what is the immediate structural consequence?
- The sponsor must immediately deposit cash into the trust to make up the deficit.
- The excess spread becomes negative, potentially triggering early amortization if it persists.
- The bondholders' principal is written down by the amount of the interest shortfall.
- Principal collections from the other pocket are used to pay the interest shortfall automatically.
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