Re-visiting UK mortgage master trust structures I Global Securitisation and Structured Finance 2008
rating drop below a defined rating level, excess spread may be trapped into a liquidity reserve, as we briefly describe below. Interestingly, in the last remnants of capitalist master trusts, Granite Funding 1, there is in fact a second reserve fund, which was structured initially to trap excess spread to fund the issuer-specific reserve funds of future issuers, but has built up considerably since the launch of the socialist de-linked master trust in early 2005.
possible, but revenue continues to be allocated pro rata between the seller and investor shares.
Following both types of trigger event, in order to protect AAA-rated tranche principal, the notes then redeem sequentially by class, starting with the Class A notes, typically in order of legal final maturity for a non- asset trigger and pro rata for an asset trigger. This is a particularly onerous event for short-dated subordinate tranches, as we articulated in our recent report on Granite.
Reserve funds aside, the credit enhancement for RMBS tranches is provided by subordinated tranches, reserve funds and excess spread. However, how this is achieved in mortgage master trust structures is exceptionally complicated. Under normal circumstances, prior to a trigger event, tight substitution criteria are in place to maintain the credit quality of the underlying portfolio, and the investor share receives all principal receipts up to its target amount and the remainder is passed to the seller. Under stressed scenarios such as insolvency of the seller or under-performance of the securitised mortgages, early amortisation may be triggered in order to preserve triple-A note principal. Stressed scenarios may cause two types of trigger event. An asset trigger event occurs when an amount is debited to the Class A principal deficiency ledger. Following an asset trigger event, principal is distributed pro rata and pari passu to the seller and investor shares according to their respective shares. A non-asset trigger event occurs upon insolvency of the seller, breach of the minimum seller share or minimum trust size or failure to appoint a new administrator following termination of the administration agreement. Following a non-asset trigger event, the mortgage trustee allocates principal 100 per cent in favour of the investor share until this is reduced to zero in order to return note principal as quickly as
There are numerous additional triggers and conditions that have been designed to protect AAA principal. Triggers that may limit pro rata payment of principal or redemption of subordinated tranches include arrears, reserve and subordinated principal tests and – in de-linked trusts – a test of sufficient credit enhancement before redeeming subordinate bonds. A number of triggers will also lead to the cessation of replenishment and perhaps increase in reserve account requirement. These include the seller’s rating, notes not being called after a step-up in coupon and the extension threshold trigger.
Finally, mortgage master trusts are also typically structured with liquidity facilities to cover any temporary interruptions to cash flow. Most trusts are structured with committed external liquidity facilities. However, in a number of trusts such as Granite and Lothian, liquidity is derived ‘internally’ - that is, by using excess principal in any given period. Rating agencies adjust the credit enhancement for such deals by sizing for the potential internal liquidity requirements.
(See Table 1 comparing key features of UK mortgage master trusts outstanding.)
This chapter is taken from previously published Deutsche Bank research.
Global Securitisation and Structured Finance 2008