The RMBS securitization market has experienced considerable changes post the global financial crisis. One noteworthy change has been to the treatment of principal and interest advancing, as a number of transactions have incorporated “stop advance” provisions. When employing these provisions, KBRA has observed that sponsors strive to strike a balance between using the feature to mitigate losses and advancing timeline ambiguity while still maintaining liquidity for high investment grade securities. As these provisions have become more prevalent, they have been accompanied by a number of structural nuances.

• Differing approaches have been used to mitigate the risk of shortfalls on investment grade (IG) securities. Some transactions feature augmented payment priorities for such classes, whereby interest from all available funds is remitted first to high IG classes before paying principal to such IG classes. We observed other structures where the risk of liquidity interruption on the senior securities is mitigated by excluding the amount of unpaid stop advance interest in the definition of interest owed within the transaction’s governing documents.
• The sponsors for some of these same transactions have added new structural features that enhance higher-priority security holders’ positions by changing payment priority or locking-out subordinate security holders from principal payments based on serious loan delinquencies.

In the publication, KBRA provides color on the “stop advance” mechanism and how certain issuers are implementing this mechanism in different ways into their respective transactions. We generally define the implementation method into a few broad constructs which address high investment grade class liquidity risk: definitional, structural, and/or via additional credit enhancement (e.g. excess spread).

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Related Publications: (available at www.kbra.com)

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About KBRA and KBRA Europe

KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and 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.

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