Kroll Bond Rating Agency (KBRA) takes an in-depth look at the prominent shifting-interest structural mechanism called the Applicable Credit Support Percentage (ACSP). The shifting-interest structure has been the predominant structure of choice for prime issuers and understanding its cash flow diversion mechanism is imperative to understanding the effect that various prepayment scenarios and liquidity stresses may have on bond performance.
In this commentary, we discuss how slowing prepayments can impact liquidity on subordinate classes in RMBS 2.0 shifting-interest structures, particularly those with stop advance features:
- Post-crisis Prime shifting-interest structures include provisions like the ACSP, to protect more senior certificates by restricting principal payable to subordinate certificates when collateral performance deteriorates.
- Shifting-interest transaction structures provide for payment of each certificates interest due before principal and pay each certificates obligations before the next priority certificate (a concept known as interest-principal-interest-principal or IPIP). Because they also typically commingle principal and interest funds, principal payable to each certificate acts as a liquidity mitigant in case interest funds are insufficient to pay current interest obligations.
- Early positive collateral performance, particularly fast prepayments early on, can build a significant credit enhancement percentage buffer against the ACSP threshold, which would allow principal funds to be allocated to subordinate certificates for longer periods of time.
- In contrast, slower CPRs increase the risk of triggering the ACSP earlier on, restricting principal funds from more subordinate certificates, and subjecting those classes to liquidity stresses without the use of mitigating principal funds.
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Related Publications: (available at www.kbra.com)
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KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
Jack Kahan, Managing Director
Ed DeVito, Senior Director