medium · Asset-Backed Securities tranching
An originator closes a $100,000,000 deal with 0 initial OC and a target OC of 2.50% of the initial balance. The pool amortizes at 2.00% per month (scheduled principal) with a 10% CPR (prepayment).
If the annual net excess spread is 6.00%, why does pool amortization make reaching the target OC more difficult over time?
- Amortization steadily increases the required dollar amount of the target OC
- The dollar amount of excess spread generated each month declines as the pool shrinks
- Scheduled principal collections are diverted into the interest waterfall during amortization
- High prepayment speeds trigger an immediate release of accumulated OC to the residual equity holder
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