Introduction to Securitization

DETERMINATION OF THE AMOUNT AND SOURCES FOR LIQUIDITY SUPPORT

There will be periods where due to a temporary shortfall in collections or some other disruption in the collection process (e.g., changeover from a normal servicer to a backup servicer) there is a need for short-term financing in order to satisfy the liabilities on a timely basis. Because of this, liquidity support or liquidity enhancement is needed; it is only intended as a temporary cash facility. The securitizer needs to determine the amount of liquidity that may be needed and arrange for a facility.

In determining the amount of liquidity, it is important to recognize that in some structures there may be internally generated liquidity. For example, in some structures there may be an accumulation payment period to retire a bullet liability. During that period, liquidity is available.

In terms of the economics of the transaction, the securitizer must realize that liquidity creation has an implicit or explicit cost. For example, if liquidity is provided by internal sources such as a cash reserve, the cost is the opportunity cost associated with reinvestment of the cash. Consequently, the structurer will seek to establish just the required amount of liquidity.

Typically, there are three sources of liquidity enhancements: bank facilities, cash reserves, and servicer advances. A servicer typically agrees to provide periodic advances to the structure so as to maintain a regular flow of payments due to the bond classes. ...