medium · Asset-Backed Securities waterfalls
A 'Reserve Account' is funded at $5,000,000 at closing. In month 5, a $500,000 draw is made to cover a senior interest shortfall. In month 6, the pool generates $2,000,000 in excess spread.
Where does this excess spread go first in a typical waterfall?
- To pay the subordinate bond's accrued interest for month 7
- To replenish the reserve account back to its $5,000,000 target
- To pay down scheduled principal on the outstanding Class A senior notes
- To be released to the residual (equity) holder as a monthly cash dividend
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