Glossary

Important notes:

Capitalised and underlined terms are defined elsewhere in the Glossary.

There are several terms in the glossary that have similar or conflicting interpretations. For ease of use, certain terms are used consistently throughout this glossary as follows:

Obligor – the person, Debtor or borrower liable in respect of the Receivables. The term Obligor is used throughout, rather than borrower, because it applies to all Receivable types, not just Loan Receivables.

Receivable - a contract under which the Obligor owes Principal and Interest on its Debt to the lender. Within a Securitisation, the receivable is an Asset of the SPV. Examples typically include Mortgage Loans, other personal or corporate Loans, Leases, and hire purchases.
For the purposes of this glossary, Receivable will be used to describe the Loan, Lease, hire purchase or other financial contract whose cash flows underlie the Securitisation.

Asset - An item of value that can be converted to cash, and may generate a cash flow. In a Securitisation transaction, the Assets comprise the Receivables that generate cash flows, and technically also include any other Assets owned by the SPV, such as cash in Reserve Accounts.
Assets are often called many other names in a SecuritisationCollateral, Pool, Receivables, or securities. For the purposes of this glossary, Assets will refer to the Receivables AND other cash reserves available to the Securitisation.

Debt Security - A written promise to pay a stipulated sum of money to a specified party under conditions mutually agreed upon and secured by Collateral. Bonds, notes, and any other forms of securitised Debt issuance, are referred to as Debt Security.

 

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# A B C D E F G H I J L M N O P R S T U V W


144A Issue

Rule 144A of the US Securities Act enables Debt Securities to be sold without registration with the US Securities and Exchange Commission. This is subject to the condition that offers may not be made to persons other than qualified institutional buyers.
Rule 144A was implemented in order to induce foreign companies to sell securities in the US capital markets, and is one of the key offer types that Australian Securitisation Issuers use to issue into the US market.
Rule 144A issues are denominated in US dollars.

AAPR

Average Annualised Percentage Rate - also known as the ‘true rate’ or Loan comparison rate. The AAPR is the average Interest rate payable over a seven-year period for a given Loan amount including all upfront fees, ongoing fees, Interest rate (and a revert to rate for the case of fixed Term, introductory and honeymoon Loans) and the Interest payable on that Loan amount over that period. Not included in the AAPR are government fees, exit/disCharge fees, service fees (e.g. redraw, internet usage fees) and any other fees that are not always applied.

AASB

Australian Accounting Standards Board - an Australian Government agency under the Australian Securities and Investments Commission Act 2001. The functions of the AASB are: to make accounting standards and participate in the development of a single set of accounting standards for worldwide use.

ABCP

Asset-backed Commercial Paper - ABS issued in the form of short-dated Discount Debt Securities, rather than the typical Coupon-bearing Debt Securities that underlie a Securitisation. The cash flow from a pool of Assets is used to repay the ABCP Face Value on maturity.

ABS

Asset-backed Security. A type of Debt Security collateralised by the cash flow from a specified pool of underlying Receivables. Typically this Term is used to describe Debt Securities backed by Receivables other than residential or commercial Mortgage Loans.

Accelerated Amortisation

The restructuring of an existing Mortgage Receivable by increasing the monthly payments in order to pay off the Receivable in a shorter time than the original maturity.

Acceleration Clause

A clause commonly included in Receivables contracts that gives the holder the right to demand the entire outstanding balance be paid in the Event of Default.

Accrued Interest

Coupon earned by an investor on a Debt Security but not yet paid to the investor usually because the next Payment Date has not yet occurred. This can also apply to Interest earned on a Receivable but not yet paid to the SPV because the next periodic Receivable date for payment has not yet occurred.

Actual/360

The method for calculating Interest payments using the actual number of days in a month and 360 days in a year.

ADI

Authorised Deposit-taking Institution - corporations which are authorised under the Banking Act 1959, and regulated by APRA. ADIs include banks, building societies and credit unions. All ADIs are subject to the same Prudential Standards.

Adjustable Rate Mortgage

ARM - a Mortgage Loan subject to changes in Interest rates. When rates change, ARM monthly payments increase or decrease at intervals determined by the lender.

Advance Rate

The amount that is advanced to an Obligor or an Issuer, as a percentage of the value of a physical Asset or pool of Receivables respectively. For example, it can refer to the maximum amount that will be advanced to an Obligor as a percentage of the value of the property or other physical Assets underlying the Receivable.

Adverse Selection

Generally refers to the risk that Receivables sold to the SPV are of a credit quality which is lower than the credit quality of the universe of Receivables originated by the Originator. It also refers to the process by which the risk profile of a Receivables pool is assumed to worsen over time because of the presumption that those Obligors who are more creditworthy are the ones who are more likely to prepay their Receivables, leaving the pool with more concentrated Credit Risk over time.

Affiliate

A person or entity who, directly or indirectly, either controls, is controlled by, or is under common control with, a specified person or entity.

A-IFRS

Australian equivalent of IFRS (International Financial Reporting Standards).

Amortisation

Refers to repayment of either Receivables or Debt Securities such that the Principal amount of the Receivables or Debt Securities reduces over time (the “amortisation period”). This is in contrast to a Bullet structure, whereby the Principal balance of the Receivables or Debt Securities does not reduce over time.
Within a certain Securitisation structures, a Revolving Period is often followed by an amortisation period. The amortisation may be ‘rapid’ (all Principal is returned to investors as received) or ‘controlled’ (only a certain amount or percentage of Principal is returned on each payment date). If a performance provision has been triggered, Principal amortisation will usually be ‘rapid’.
If the Securitisation structure does not have a Revolving Period, it is usually an amortising structure from the day of issue.

Annual Percentage Rate

APR - calculated using a standard formula, the APR shows the true cost of a Receivable, expressed as a yearly Interest rate/percentage. It includes the Interest, Lenders Mortgage Insurance, and other fees associated with the Receivable.

AOFM

Australian Office of Financial Management - Australian Government agency responsible for management of Australian Government Debt, cash balances and investments in financial Assets. The AOFM invests in RMBS under a Government program to maintain competition in lending for housing in Australia.

Application Fee

The fee Charged by a lender to cover or partially cover the lender’s costs of setting up or establishing the Receivable. The fee does not guarantee that the Receivable will be approved.

Appraised Value

An estimate of the value of the property offered as Security for a Mortgage Loan. This appraisal is done for Mortgage lending purposes and may not reflect the market value of the property.

APRA

Australian Prudential Regulation Authority – the regulator that oversees ADIs, insurance companies, and most members of the superannuation industry. APRA is responsible for the creation, maintenance and adherence to Prudential Standards.

APS

APRA Prudential Standards – these standards form part of the framework under which APRA supervises and regulates ADIs. One of the key standards that impacts Securitisation by ADIs is APS 120 (Securitisation).

Arbitrage

The purchase and sale of Debt Securities simultaneously in order to take advantage of price differentials that generally creates a risk-free profit.

Arranger

The party that usually structures and arranges the transaction offering on behalf of the Sponsor, and manages the allocations of Debt Securities to investors. Also referred to as Lead Manager.

Arrears

An overdue amount that has not yet been paid, on a Receivable that is still performing, i.e. has not yet been written-off. Refer also to Days in Arrears.

ASF

Australian Securitisation Forum – an industry body which represents participants in the Securitisation market to promote the development of Securitisation in Australia. The ASF represents the industry to government, regulators, the public, investors and others.

ASIC

Australian Securities and Investments Commission. ASIC is Australia’s corporate, markets and financial services regulator. ASIC is an independent Commonwealth Government body set up under the Australian Securities and Investments Commission Act (ASIC Act). ASIC carry out most of their work under the Corporations Act.

Asset

An item of value that can be converted to cash, and may generate a cash flow. In a Securitisation transaction, the Assets comprise the Receivables that generate cash flows, and technically also include any other Assets owned by the SPV, such as cash in Reserve Accounts.
Assets are often called many other names in a SecuritisationCollateral, Pool, Receivables, or securities. For the purposes of this glossary, Receivable will be used to describe the Loan, Lease, hire purchase or other financial contract whose cash flows underlie the Securitisation. Assets will refer to the Receivables AND other cash reserves available to the Securitisation.

Asset-backed Commercial Paper

ABCP - ABS issued in the form of short-dated Discount Debt Securities, rather than the typical Coupon-bearing Debt Securities that underlie a Securitisation. The cash flow from a pool of Assets is used to repay the ABCP Face Value on maturity.

Asset-backed Security

ABS - a type of Debt Security collateralised by the cash flow from a specified pool of underlying Receivables. Typically this Term is used to describe Debt Securities backed by Receivables other than residential or commercial Mortgage Loans.

Asset Lender

Lending institution that lends finance based on the value of the physical Asset, which will be held as Security.

Austraclear

A provider of settlement services for the Australian OTC Debt and derivatives markets. It is a wholly-owned subsidiary of ASX Group.

Authorised Deposit-taking Institution

ADI - corporation authorised under the Banking Act 1959, and regulated by APRA. ADIs include banks, building societies and credit unions. All ADIs are subject to the same Prudential Standards.

Authorised Investments

The investments that a Securitisation vehicle may make as permitted by the transaction documents.

Average Annualised Percentage Rate

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AAPR - also known as the ‘true rate’ or Mortgage Loan comparison rate.. The AAPR is the average Interest rate payable over a seven-year period for a given Loan amount including all upfront fees, ongoing fees, Interest rate (and a revert to rate for the case of fixed Term, introductory and honeymoon Loans) and the Interest payable on that Loan amount over that period. Not included in the AAPR are government fees, exit/disCharge fees, service fees (e.g. redraw, internet usage fees) and any other fees that are not always applied.

Backup Servicer

The entity that will administer and service the Receivables portfolio in the event that the Servicer Defaults, resigns or is removed. Back-up servicing arrangements can be 'cold' (the Servicer and Backup Servicer do not regularly share data or system information), 'warm' (Servicer and Backup Servicer systems are generally aligned and data may be shared regularly) or 'hot' (Servicer and Backup Servicer systems are generally run in parallel).

Balloon Loan

A Loan that requires the remaining Principal balance to be paid at a specific point in time. For example, a Loan may be amortised as if it would be paid over a 30- year period, but requires that at the end of the tenth year the entire remaining balance must be paid.

Banker’s Lien

The right of a bank to retain a customer’s Securities until a Liability to the bank is discharged.

Bankruptcy

The legal financial state an individual is in when unable to meet Debts (for companies it’s known as being ‘wound up’). An Obligor may be declared bankrupt by the Federal Court at either the Obligor’s’s or the creditor’s instigation, and the Obligor’s estate will be placed in the hands of an official receiver who will distribute the estate in accordance to the provisions of the Bankruptcy Act.

Bankruptcy-remote

In a Securitisation, the SPV is required to be bankruptcy-remote. Receivables are transferred from the Originator to the SPV, and claims of the Originator’s or Servicer’s creditors cannot be made against the Receivables underlying the Securitisation. It also means that the SPV itself is unlikely to become bankrupt should the Originator become bankrupt.

Base Case Loss Assumption

An assumed level of losses that may be considered likely in a relatively benign or steady state environment for a given pool of Receivables.

Basis Point

One one-hundredth of 1%. Yield differences among Debt Securities are stated in basis points. For example, 125 basis points equates to 1.25%. Written as 125bps.

Basis Risk

Occurs when the reference rates for Assets and Liabilities are based on different indices. For example, when the Interest payable on a pool of Receivables is based on 3-month BBSW and the Interest rate payable on Debt Securities is 3-month LIBOR.

Basis Swap

A contract whereby a party swaps Floating–rate Interest payments referenced using a specific index, for Floating-rate Interest payments referencing a different index, at a predetermined date and rate, in order to mitigate Basis Risk within a transaction.

BBSW

Bank Bill Swap Rate, a mid-price bank bill reference rate published daily.

BBSY

Bank Bill Swap Bid Rate, a bid-price bank bill reference rate published daily.

Beneficial Ownership / Beneficial Assignment / Beneficial Title

An assignment or transfer of rights in the Interests in the Receivables, rather than full legal ownership. The beneficial owner benefits from owning an Asset, even if the Asset’s Title of ownership is in the name of another party.
Beneficial assignment is accompanied by authority to perfect or protect that beneficial Interest in certain situations (Title Perfection events). Also referred to as Equitable Ownership / Equitable Assignment / Equitable Title.

Bid

The price at which a buyer is willing to buy a Debt Security.

Bond

A written promise to pay a stipulated sum of money to a specified party under conditions mutually agreed upon. Also called a Promissory Note, ‘promise’ or ‘bond’. Throughout this glossary, bonds, and any other forms of securitised Debt issuance, are referred to as Debt Securities.

Bond Factor

The ratio of the current Stated Amount of a Class of Debt Securities to the original Stated Amount of the Class.

Book Entry

A method of registering and transferring ownership of Debt Securities electronically, thereby eliminating the need for physical certificates.

Bookbuild

The process whereby the Lead Manager gathers bids for the Debt Securities to determine the price, Margin and yield.

Borrower

A person who has been approved to receive a Loan and is then obligated to repay it and any additional fees according to the Loan terms (also called a Mortgagor or Obligor). For consistency, the term Obligor is used throughout this glossary, although the term Borrower is more commonly used in reference to a Mortgage Loan.

Bps

Basis Points - One one-hundredth of 1%. Yield differences among Debt Securities are stated in Basis Points. For example, 125 Basis Points equates to 1.25%.

Break Costs

Penalty charges for ‘breaking’ or discontinuing the agreed fixed Term of a Receivable.

Broker

A party that assists in arranging funding or negotiating contracts for a lender but who does not lend the money themselves. Brokers usually Charge a fee or receive a commission for their services.

Bullet

A bullet payment refers to a payment on a Receivable OR a payment on a Debt Security, where the Receivable or Debt Security is structured such that the Receivable or Debt security is repaid in full with only one single Principal payment at maturity (a bullet maturity) or on specified repayment dates. A bullet structure can be categorised as soft (all Principal expected to be paid on the Expected Maturity Date) or hard (all Principal due on the Maturity Date). A bullet Securitisation structure is distinct from a Pass-through structure.

Business Day

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Also known as ‘working day’. It comprises Monday to Friday, but not public holidays.

Calculation Agent

A party responsible for calculating the amount owed by the parties to a Swap arrangement.

Call Date

The date on which the Debt Securities can be redeemed (effectively bought back by the Issuer/Trustee) prior to the Legal Maturity Date. The Issuer has the right to redeem the Debt Securities, but does not have an obligation to redeem. In many cases, if the Call Option is not exercised on the Call Date, the Margin steps-up to a higher level, as an incentive to the Issuer to exercise the Call Option.
Receivable pool has been paid down to a small proportion of the original balance, say 5% or 10%. Refer also to Redemption.

Call Option

Exists when the Debt Securities can be redeemed (effectively bought back by the Issuer/Trustee) prior to the Legal Maturity Date. The Issuer has the right to redeem the Debt Securities, but does not have an obligation to redeem. In many cases, if the Call Option is not exercised on the Call Date, the Margin steps-up to a higher level, as an incentive to the Issuer to exercise the Call Option.
The term ‘Clean-up Call’ is used for a Call Option which exists at a point when the underlying Receivable pool has been paid down to a small proportion of the original balance, say 5% or 10%. Refer also to Redemption.

Call Protection

A feature that provides assurance to an investor that early or unscheduled redemption of a particular Debt Security will not occur due to a decline in Interest rates.

Capital Improvement

A structure or major piece of equipment built or installed to permanently add value and capacity to property.

Capital Relief

Historically, Securitisation has been one avenue ADIs have taken to obtain capital relief. Capital relief refers to the ability to effectively reduce the (inefficient and costly) capital required to be held by regulated entities against their Assets under Basel and APRA regulations.

Cash Collateral

A form of Credit Enhancement involving the maintenance of a Reserve Account that can be tapped in the event of credit losses and subsequent claims by investors.

Caveat

If a caveat is lodged upon a Title to land it indicates that another party other than the owner claims some right over or Interest in the property.

CDO

Collateralised Debt Obligation - a Debt Security backed by a pool of Bonds, Loans and other Receivables. CDOs do not specialize in one type of Debt but are often non-Mortgage Loans or Bonds. The CDO can be cash flow or synthetic (i.e. the credit value is derived from a Debt that the SPV does not actually own).

CDS

Credit Default Swap – A synthetic structure whereby the buyer of the CDS makes a series of payments to the Seller and, in exchange, the Seller of the CDS will compensate the buyer in the event of a Loan Default (for a Loan that is referenced in the CDS). Compensation for Loan Default is usually the Face Value of the Loan.

Certificate of Deposit

A time deposit held in a bank that pays Interest to the depositor.

Certificate of Title

A document identifying the ownership of land. It shows who owns the land and whether there are any Mortgages or other restrictions on it. This document (if issued) is usually held by the lender as Security for a Mortgage Loan.

Charge

The Term used to describe any right established over an Asset to secure a DDebt or performance of an obligation.

Charge-offs

A Debt that is unlikely to be repaid and is written off. This term can apply to either the underlying Receivable, or the Debt Security issued, but is more commonly used in reference to a Debt Security.

Chattel Mortgage

A Loan secured by personal property rather than Real Estate.

Chattels

Personal property, such as clothing, appliances and furniture.

Cherry Picking

The practice of selecting Receivables from a portfolio based on specific criteria, the opposite of a sample selected at random.

Class

One of a series of Debt Securities secured by a single pool of Receivables. The classes have different terms and conditions and rank in different orders in the payment Waterfall, leading to each class having varying levels of Credit Risk. Different classes can be denominated in different currencies and have differing maturity dates. Also referred to as a Tranche.

Clear Title

A Seller has a clear Title when there are no restrictions (e.g. an outstanding Mortgage) preventing the sale, and when ownership of the Seller has been established. Also referred to as unencumbered Title.

Clearstream

Provider of European post-trading services in a number of Debt Securities. It is also the International Central Securities Depository (ICSD) and the Central Securities Depository (CSD) for Germany.

Closing Date

This can refer to the settlement of a Receivable or the issuing of Debt Securities. It is the date on which:

and the new owner/investor takes possession. It is at this time that the Obligor/Issuer takes on the Receivable or Debt Security obligation and pays all closing costs. In the case of an Asset sale, it is also the date that the Obligor receives Title from the Seller. Also referred to as Settlement Date.

CMBS

Commercial Mortgage-backed Security - a Debt Security whose cash flow is backed by the Principal and Interest payments from a specified pool of Mortgage Loans that are secured by Mortgages over commercial property.

Collateral

Any property or physical Asset (such as vehicles or equipment) with monetary value, given as Security for repayment of a Debt. Collateral is often called many other names in a SecuritisationAssets, Properties, Receivables, or Security. It is the Assets which underlie the Securitisation, the cash flows they generate, and any other cash, Assets or reserves owned by the SPV that form Collateral for a Securitisation.
For the purposes of this glossary, Receivable will be used to describe the Loan, Lease, hire purchase or other financial contract whose cash flows underlie the Securitisation. Assets will refer to the Receivables AND other cash reserves available to the Securitisation.

Collateralised Debt Obligation

CDO - a Debt Security backed by a pool of Bonds, Loans and other Receivables. CDOs do not specialize in one type of Debt but are often non-mortgage Loans or Bonds. The CDO can be cash flow or synthetic (i.e. the credit value is derived from a Debt that the SPV does not actually own).

Collection

When an Obligor falls behind, the lender contacts them in an effort to make the Receivable current again (i.e. all Arrears paid). The Receivable goes to ‘collection’. As part of the collection effort, the lender must mail and record certain documents in case they are eventually required to foreclose on the property or seize other physical Assets.

Collection Account

A separate bank account for the deposit of Collections by the Servicer for securitised Receivables.

Collection Period

The period during which receipts from Obligors are allocated by the Servicer to a given Payment Date.

Commercial Mortgage-backed Security

CMBS - a Debt Security whose cash flow is backed by the Principal and Interest payments from a specified pool of Mortgage Loans that are secured by Mortgages over commercial property.

Commercial Mortgage Loan

A Mortgage Loan secured by Real Estate used by a business or to generate income. Also called an income Loan or investment Loan.

Commingling Risk

The risk that cash belonging to an issuing SPV is mixed with cash belonging to a third party (e.g. the Originator or Servicer) or goes into an account in the name of a third party in such a way that, in the Insolvency/Bankruptcy of the third party, such cash cannot be separately identified or the cash is frozen in the accounts of the third party.

Concentration Risk

The risk that large exposures to individual Obligors, or to certain types of Obligors or products, or geographic concentrations, may increase the Credit Risk of a portfolio. Generally, additional Credit Enhancement will be required to mitigate concentration risk in portfolios.

Conduit

An entity which purchases Receivables from several different Sellers, and funds the purchases by issuing ABS or ABCP.

Consolidated Loans

Loans in the securitised pool which are Split-Loans that are secured by the same properties.

Construction Loan

A short-term Loan to finance construction costs. The lender makes payments to the builder at certain intervals during construction.

Contract of Sale

A written agreement outlining the terms and conditions for the purchase or sale of property.

Controlled Amortisation

A period that may follow the Revolving Period of a transaction, during which the outstanding balance of the related Debt Securities is partially repaid. A controlled Amortisation period is usually 12 months in length.

Conveyance

The legal process for the transfer of ownership of Real Estate.

Cornerstone Investor

Initial large investor which may be a listed company, private equity fund or a high net worth investor.

COSL (Credit Ombudsman Service Limited).

COSL offer an impartial dispute resolution service for resolving complaints with a participating financial service provider. Formerly known as MIOS (Mortgage Industry Ombudsman Service).

Coupon

The contractual Interest obligations of an Issuer of Debt Securities. Usually comprises a Coupon Reference Index plus a Margin (e.g. 1 month BBSW + 125bps) OR a fixed coupon (e.g. 7%)

Coupon Rate

Stated annual percentage of Interest paid on a Debt Security.

Coupon Reference Index

The name of the base reference Coupon index, e.g. 3 month BBSW.

Covered Bond

Debt Securities backed by cash flows from Mortgage Loan Receivables. They are similar in many ways to Asset-backed Securities, but Covered Bond Receivables remain on the Originator’s balance sheet, and hence Secured Creditors are exposed not only to the Credit Risk of the Receivables, but also to the Credit Risk of the Originator.

CPR

Constant (or Conditional) Prepayment Rate – the standard measure of Prepayments in Australia. CPR is the amount of Principal prepaid in excess of scheduled repayments expressed as an annualised percentage.

CRA

Credit Rating Agency - a party that forms an opinion on the likelihood that Debt Securities will be repaid in a timely fashion. CRAs are licenced by ASIC.

Credit Default Swap

CDS – A synthetic structure whereby the buyer of the CDS makes a series of payments to the Seller and, in exchange, the Seller of the CDS will compensate the buyer in the event of a Loan Default (for a Loan that is referenced in the CDS). Compensation for Loan Default is usually the Face Value of the Loan.

Credit Enhancement

Refers to the features, facilities or rights within the transaction, intended to protect investors from losses with respect to securitised cash flows. Credit enhancement aims to mitigate Credit Risk within the transaction, credit enhancement can be in the form of External Credit Enhancement or Internal Credit Enhancement. It is also sometimes categorised as being either hard credit support (in place from the time the transaction closes) or soft credit support (may be partially in place at the time the transaction closes, but may build up over the life of the transaction).

Credit History

A record of an individual’s repayment of Debt. Credit histories are reviewed by Originators as one of the underwriting criteria in determining Credit Risk.

Credit Rating

An opinion about a Debt Security’s creditworthiness, provided by a Credit Rating Agency.

Credit Rating Agency

CRA - a party that forms an opinion on the likelihood that Debt Securities will be repaid in a timely fashion. CRAs are licenced by ASIC.

Credit Report

A report of an individual’s credit history prepared by a credit bureau and used by a lender in determining a Receivable applicant’s creditworthiness.

Credit Risk

Risk of a Default by the Issuer or other party in its financial obligations to the investor or other Secured Creditor.

Credit Support

Also called Credit Enhancement, Credit Support refers to the features, facilities or rights within the transaction, intended to protect investors from losses with respect to securitised cash flows. Credit Enhancement aims to mitigate Credit Risk within the transaction, Credit Enhancement can be in the form of External Credit Enhancement or Internal Credit Enhancement. It is also sometimes categorised as being either hard credit support (in place from the time the transaction closes) or soft credit support (may be partially in place at the time the transaction closes, but may build up over the life of the transaction).

Currency Swap

A contract whereby a party swaps Principal and/or Interest payments in one currency for another currency at a predetermined date and rate, in order to mitigate currency risk within a transaction.

Current Loan Balance

Outstanding amount of the Receivable. The current Loan balance should include all due and unpaid Principal, Interest, any penalty Interest, as well as other fees and costs Charged to the Receivable balance.

CUSIP Number

A unique, nine-digit identification number permanently assigned by the Committee on Uniform Securities Identification Procedures to each publicly traded Debt Security at the time of issuance. If the Debt Security is in physical form, the CUSIP number is printed on its face.

Custodian

Entity responsible for holding and safe-keeping of the Receivables.

Cut-off Date

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The final date on which Receivables are identified to a specific SPV.

Days in Arrears

The number of days that a Receivable has been in Arrears. This is typically based on Scheduled Balance Arrears Methodology or Missed Payments Arrears Methodology for pools of Mortgage Loans, or such other methodology as determined by the Servicer. Refer also to Arrears.

Debit Card Facility

An electronic means of accessing and withdrawing funds immediately.

Debt

A specified sum of money due at a specified time and bearing Interest at a specified rate.

Debt Security

A written promise to pay a stipulated sum of money to a specified party under conditions mutually agreed upon and secured by Collateral. Throughout this glossary, Bonds, notes, and any other forms of securitised Debt issuance, are referred to as Debt Securities.

DEF

Deferred Establishment Fee –a fee which is now banned in Australia, which was previously charged if a Mortgage Loan paid out within a set period of time after the Loan settled (usually any time up to 4 years). In 2011 the NCCP regulations were amended to include a ban on DEFs and certain other exit fees relating to credit contracts secured over residential property. It should be noted that DEFs can still be charged on Loans secured over commercial property.

Default

Failure to abide by the terms of a Receivable agreement, resulting in a failure to make Receivable payments when due. Defaulting on the Receivable may result in the Receivable provider taking legal action to repossess the underlying physical Asset (e.g. mortgaged property or vehicle).

Default Frequency

The probability or likelihood that an Obligor will Default on Receivable obligations, measured as a proportion of the entire pool of Receivables.

Deferred Establishment Fee

Deferred Establishment Fee –a fee which is now banned in Australia, which was previously charged if a Mortgage Loan paid out within a set period of time after the Loan settled (usually any time up to 4 years). In 2011 the NCCP regulations were amended to include a ban on DEFs and certain other exit fees relating to credit contracts secured over residential property. It should be noted that DEFs can still be charged on Loans secured over commercial property.

Deferred Interest

Deferring unpaid Interest by adding it to the Debt balance.

Deposit Bond

Guarantees that the purchaser of a property will pay the full deposit by the due date. Institutions providing deposit bonds act as a guarantor that payment will be made.

Determination Date

The date on which payments to investors are calculated by the Manager.

Dilution

A reduction in the Receivable balance, due to items other than cash payment or Default — for example, a return of merchandise relating to a trade receivable.

Direct Debit

Where the lender debits (deducts) a payment from client’s bank, credit union or building society account.

Disbursements

Solicitors’ incidental costs involved when dealing with client on behalf of the lender, e.g. searches, certificates and pest reports.

Discharge Fees

An administration fee to cover the costs incurred in finalising a Loan account.

Discharge of Mortgage

A document signed by the lender and given to the Obligor when a Mortgage Loan has been repaid in full.

Discount

A Discount to Face Value indicates a Debt Security is sold or available for sale at a price below Face Value,

DSR

Debt service ratio which measures the ratio of cash available for servicing Debt, to the amount of Interest, Principal and other payments payable.

Due-on-sale Clause

A provision in a Mortgage or deed of Trust enabling the lender to demand instant payment of the balance of the Mortgage when the Mortgagor sells the home.

Dynamic Sizing

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Describes the process whereby the level of Credit Enhancement in a Securitisation is resized on each Payment Date during the Revolving Period, usually based on a rolling average basis.

Early Amortisation Event

An event, as defined in the transaction documents, that could trigger an immediate end to the Revolving Period or Substitution Period to facilitate the early repayment of investor Principal.

Early Repayment

The repayment of a Receivable in full by the Obligor before the end of the Receivable Term.

Effective Interest Rate

A variable Interest rate translated into the rate that would be paid if the Interest was compounded on a semi-annual basis.

Eligibility Criteria

The criteria used by the Originator to select Receivables for transfer to a SPV.

Encumbrance

Any kind of claim against property, such as Mortgages, Leases, easements or restrictions.

Equitable Ownership / Equitable Assignment / Equitable Title

An assignment or transfer of rights in the interests in the Receivables, rather than full legal ownership. The equitable owner benefits from owning an Asset, even if the Asset’s Title of ownership is in the name of another party. Equitable assignment is accompanied by authority, to perfect or protect that equitable interest in certain situations (Title Perfection events). Also referred to as Beneficial Ownership / Beneficial Assignment / Beneficial Title.

Equity

A homeowner’s financial Interest in a property. Equity is the difference between the price for which a home could be sold and the amount still owed on its Mortgage. Equity usually increases as the outstanding Principal of the Mortgage is reduced through regular payments. Market values and improvements to the property also affect equity. Equity can also refer to the First Loss Piece in a Securitisation structure

Establishment Fees

Fees payable to a lender to cover the costs of setting up a Receivable.

EURIBOR

Euro Interbank Offered Rate - a daily reference rate based on the averaged Interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the euro wholesale money market.

Euroclear

A provider of settlement services for Debt Securities, equities, funds and derivatives.

Event of Default

EOD - specified contractual event that when triggered will result in the lender/Secured Creditors calling for the outstanding amount of the Receivable/Debt Security from the Obligor/Issuer respectively. One of the key EODs in a Securitisation is a failure by the Issuer to make a payment to a Secured Creditor (e.g. a Coupon payment) as and when due (subject to a grace period of around 2 days).
Following an EOD, the Waterfall used to determine payments is the “post-event of default” Waterfall (as opposed to the “pre-event of default” Waterfall).

Excess Spread

Excess income available after Coupon payments and expenses due to Secured Creditors are paid. Excess spread is subsequently applied to Principal Charge-offss or losses which exist at that time. Any remaining excess spread may then be paid into a Reserve Account and used as a Credit Enhancement, or it may be released to another party (the Residual Income Unitholder).

Exchange-traded

Traded via an exchange compared to over-the-counter.

Exit/Prepayment Fees

Penalties Charged by the lender when a Receivable is paid off before the end of its Term. Exit fees generally apply to fixed Interest rate Receivables.

Expected Maturity Date

The date as of which Debt Securities are expected to be repaid in full, based on a specified assumption regarding the rate at which the underlying Receivables will be repaid or refinanced.

Expert

A person who is named in an Offer Document as having prepared or certified any part of the Offer Document, or as having prepared or certified any report or valuation for use in connection with that Offer Document.

Extension Risk

Risk that Prepayments will be slower than the assumed rate causing later-than-expected return of Principal.

External Credit Enhancement

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Credit Enhancement provided by a third party, e.g. guarantee, letter of credit or Lenders Mortgage Insurance.

Face Value

The par value of a Debt Security, as distinct from its market value.

Fair Market Value

The hypothetical price that a willing buyer and Seller will agree upon, when they are acting freely, carefully and with complete knowledge of the situation.

Fast Pay

Effectively switches a Pro-rata Pay cash flow allocation to a Sequential Pay cash flow allocation, usually upon a breach of a transaction performance trigger.

First Loss Piece

The most junior Class in a Securitisation that provides support to the pool of Receivables such that any losses are applied firstly to this Class of Debt Securities.

Fixed-rate

This can refer to the Interest rate on the underlying Receivables, or on the Debt Securities issued. The rate of Interest does not change for the Term of the Receivable or Debt Security.

Floating-rate

This can refer to the Interest rate on the underlying Receivables, or on the Debt Securities issued. The rate of Interest is variable or adjustable for the Term of the Receivable or Debt Security issue, referenced against a market reference rate, e.g. BBSW. Also referred to as Variable-rate, particularly when in reference to a Mortgage Loan.

Forbearance

Postponing some or all Loan payments when an Obligor is in Arrears.

Foreclosure

Legal process by which an Obligor in Default under the terms of a Mortgage ceases to have an Interest in the Mortgaged property. This usually involves a forced sale of the property with the proceeds of the sale being used to reduce or clear the Mortgage Debt.

FOS

Financial Ombudsman Service. FOS independently resolves disputes between consumers — including some small businesses — and member financial services providers in Australia. Dispute resolution covers financial services disputes including credit and Loans.

Freehold

The dwelling and the land on which it stands is owned by the owner until they choose to sell it.

Fully Amortising Loan

A Receivable in which the Principal and Interest will be repaid fully through regular instalments by the time the Receivable’s Term ends.

Further Advance

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A Loan in which the Obligor extends the amount of the Mortgage Loan.

General Insurance Policy

Insurance protecting against loss to property caused by, for example, fire, some natural causes and vandalism etc. depending upon the terms of the policy.

GIC

Guaranteed Investment Contract - a deposit account provided by an ADI that guarantees a minimum rate of return. Such contracts help to mitigate Reinvestment Risk.

Gross Defaults

The balance of Receivables that have Defaulted, including the Principal balance and any capitalised Interest.

Guaranteed Investment Contract

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GIC - a deposit account provided by an ADI that guarantees a minimum rate of return. Such contracts help to mitigate Reinvestment Risk.

Honeymoon Rate

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An initial, below-market Interest rate offered on Mortgage Loans over the first few years. After the initial time period, the permanent rate takes effect. Also referred to as a teaser rate or buy-down.

IASB

International Accounting Standards Board – sets standards for IFRS.

IFRS

International Financial Reporting Standards. The IFRS Foundation is an independent organisation aiming to develop understandable, enforceable, globally accepted IFRS’s.

Information Memorandum

An Offer Document promoting the sale of Debt Securities to institutional investors. Also known as an Offering Circular.

Insolvency-remote

In a Securitisation, the SPV is required to be insolvency-remote. Receivables are transferred from the Originator to the SPV, and claims of the Originator’s or Servicer’s creditors cannot be made against the Receivables underlying the Securitisation. It also means that the SPV itself is unlikely to become Insolvent should the Originator become Insolvent.

Instalment

The regular periodic payment that an Obligor agrees to make to the lender.

Interest

Amount Charged for borrowing money, expressed as a percentage.

Interest Only

IO - a Receivable requiring the Obligor to make Interest payments but not Principal payments.

Interest-only Strip

IO Strip - a Debt Security whose entitlements relate specifically to excess Interest Margin in a transaction. The Debt Security does not have a Principal balance, and Interest payments are calculated on a notional balance which may be fixed, or change over time.

Interest Rate Swap

An agreement between two parties to switch payments of differing Interest rates for a certain period.

Internal Credit Enhancement

Structural mechanisms built into a Securitisation to improve the credit quality of Debt Securities issued. Examples include Subordination, Excess Spread trap, and Overcollateralisation.

Invested Amount

The total Principal balance of a Class of Debt Securities, excluding Charge-offss and Reimbursements.

Investment Property

A property purchased for the sole purpose of earning a return on the investment, either in the form of rent or capital gain. The owner does not live in the property.

IO

Interest Only - a Receivable requiring the Obligor to make Interest payments but not Principal payments.

IOSCO

International Organization of Securities Commissions. IOSCO is an association of organisations that regulate the world’s Debt Securities and futures markets. Members are typically the Securities Commission or the main financial regulator from each country. The Australian member is ASIC. IOSCO aims to develop, implement and promote adherence to internationally recognised and consistent standards of regulation, oversight and enforcement in order to protect investors and promote investor confidence, maintain fair, efficient and transparent markets, and address systemic risks

IO Strip

Interest Only Strip - a Debt Security whose entitlements relate specifically to excess Interest Margin in a transaction. The Debt Security does not have a Principal balance, and Interest payments are calculated on a notional balance which may be fixed, or change over time.

ISDA

International Swaps and Derivatives Association. ISDA is also used to generally refer to the documentation that governs a Swap.

ISIN

International Securities Identification Number. The standard coding for internationally traded Debt Securities which is used by most countries.

Issue Date

The date on which a Debt Security is deemed to be issued or originated.

Issuer

An entity which issues and is obligated to pay amounts due on Debt Securities.

Issuer Trustee

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In Australia, the Trustee (as Trustee for the Trust) is often the Issuer. The full legal name of the transaction is “ABC Trustee as Trustee for XYZ Trust”. The issuer trustee issues the Debt Securities and effectively acts in Trust for the Secured Creditors of the SPV.

Joint Lead Managers

Jointly responsible for the design, structure and placement of new issue of Debt Securities with investors.

Jurisdiction

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The geographical area to which practical authority applies to deal with legal matters.

Lead Manager

The party that usually structures and arranges the transaction offering on behalf of the Sponsor, and manages the allocations of Debt Securities to investors. Also referred to as Arranger or bookrunner.

Lease

A written agreement between the Asset owner and a lessee that stipulates the payment and conditions under which the lessee may possess the Asset for a specified period of time.

Legal Title

Actual legal ownership of the Receivables (as opposed to Equitable Ownership / Beneficial Ownership).

Lenders Mortgage Insurance

LMI - an insurance policy on an individual Mortgage Loan, or pool of Mortgage Loans, to protect the lender from any shortfall in the event of a Default by the underlying Obligor(s) and shortfall on realisation of the properties securing those Loans. LMI is required primarily for Obligors with a deposit of less than 20% of the property’s purchase price.

Lending Policy

An institution’s statement of its basic lending philosophy, including standards, guidelines and limitations that are to be observed and adhered to in the process of deciding whether to grant a Receivable contract. The policy must adhere to applicable law and regulations.

Letter of Credit

An agreement between a bank and another party under which the bank agrees to unconditionally and irrevocably make funds available to or upon the order of the other party upon receiving notification.

Liability

A Debt or an obligation.

LIBOR

London Interbank Offered Rate - average Interest rate that leading banks in London Charge when lending to other banks

Lien

A Security Interest or Charge over property to ensure repayment of Debt.

Line of Credit

A pre-established Loan authorisation with a specified borrowing limit extended by an Originator. A Line of Credit allows Obligors to obtain a number of Loans without re-applying each time as long as the total of borrowed funds does not exceed the credit limit.

Liquidity Enhancement

A form of support that mitigates the timing mismatch of cash flows (income from Receivables and Waterfall expenses) of a structured deal. Examples include liquidity reserves, Liquidity Facilities, Principal Draws and Timely Payment Cover.

Liquidity Facility

A contract whereby the liquidity facility provider lends cash to a SPV to compensate for any timing mismatches between the securitised Receivables and the associated Debt Securities. In ABCP, the cash is used to redeem maturing paper as required.

LMI

Lenders’ Mortgage Insurance. An insurance policy on an individual Mortgage Loan, or pool of Mortgage Loans, to protect the lender from any shortfall in the event of a Default by the underlying Obligor(s) and shortfall on realisation of the properties securing those Loans. LMI is required primarily for Obligors with a deposit of less than 20% of the property’s purchase price.

Loan

A contract under which the Obligor owes Principal and Interest on its Debt to the lender. Within a Securitisation, the loan is an Asset of the SPV. Examples typically include Mortgage loans, auto loans, and other personal or corporate loans.
For the purposes of this glossary, the broader “Receivable” term (which covers loans, Leases, etc) is used.

Loan-to-value Ratio

LTV Ratio or LVR - a percentage calculated by dividing the amount borrowed by the value of the property used as Security for the Loan.

Lock-box

Typically a US feature, whereby Collections are directed to a special account called a ‘lock-box’ so as to reduce Commingling Risk.

Long-Term Debt Security

A Debt Security with a maturity of more than one year.

Loss Curve

With respect to a sample of Receivables, the loss curve is a graphical representation of the pattern of losses experienced over time, based on plotting the Defaults or losses that occur over the life of all Receivables in the sample, usually depicting the cumulative loss rate over the Term of the Receivable pool.

Low-doc Loan

A Loan where the source and the affordability of the Mortgage applied for is accepted without full provision of supporting documentation and verification by the Originator.

LTV

Loan-to-value Ratio or LVR - a percentage calculated by dividing the amount borrowed by the value of the property used as Security for the Loan.

LVR

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Loan-to-value Ratio or LTV Ratio - a percentage calculated by dividing the amount borrowed by the value of the property used as Security for the Loan.

Manager

Entity that is responsible for the day-to-day operations of the Securitisation transaction, including determining the cash flows generated from the Receivables and the calculation of payments and fees due to the relevant counterparties and investors of the transaction. Also referred to as Trust Manager.

Margin

Typically, the credit spread set on the Pricing Date of the Debt Security. It is the Basis Point spread added to the Coupon Reference Index to determine the Interest payable on a Floating-rate Debt Security.

Market Value Decline

MVD – In relation to Credit Rating Agency stresses and assumptions, MVD refers to the percentage by which it is assumed property valuations will decline at particular stress levels, e.g. 45% MVD at AAA rating level

Mark to Market

The accounting process to adjust the value of an Asset to reflect the current market value rather than the accounting book value. Mark to market values are typically obtained for financial instruments quoted on an exchange or valued using an industry-accepted valuation model.

Master Trust Deed

The document provides for the creation of a number of Trusts and sets out the powers and responsibilities of the Trustee and the Manager.

Match Funding

Funding an Asset with a Liability that has the same repayment profile.

Material Adverse Effect

A clause or provision that is included in Securitisation transaction documents that enables one transaction party to remedies upon certain actions (or failures to act) by another transaction party.

Maturity Date

The date on which the Principal balance of a Receivable, Debt Security or other financial instrument becomes due and payable or the agreement is renewed. It is the date by which a specific Class of Debt Securities must be repaid in order not to be in Default. In relation to a Securitisation transaction, it is also the last possible date on which an Asset (Receivable or other Asset, such as cash account) within the pool can mature.

MBS

Mortgage-backed security. Refer to RMBS and CMBS.

Mezzanine Debt Security

A Subordinated Debt Security, which therefore ranks below a senior-ranking Debt Security, but ranks above the most Subordinated Debt Security in the structure (generally the unrated equity or First Loss Piece).

MFAA

Mortgage & Finance Association of Australia

Middle Market Investors

A Term used to describe investors that sit (in size and sophistication) between institutional/wholesale investors, and retail investors (mums and dads). Examples of Middle Market Investors include local councils, high net worth individuals, charities, universities and churches.

Missed Payments Arrears Methodology

Under this approach, a Mortgage Loan will be Classified as being in Arrears if an Obligor is one or more scheduled payments past due. A Mortgage Loan will be treated as in Arrears if a payment is missed, even though the Current Loan Balance is less than the Scheduled Loan Balance.

Mortgage

A form of Security for a Loan usually taken over Real Estate. The lender, the Mortgagee has the right to take (repossess) the Real Estate if the Mortgagor fails to repay the Loan.

Mortgagee

The party to whom a Mortgage is granted, generally the Originator for an Equitable Title program and the Trustee for a Legal Title program.

Mortgagor

The owner of Real Estate who pledges the property as Security for the repayment of a Debt; the Borrower, the Obligor.

MTN

Medium-Term note – Debt Security with a Tenor of 1 to 3 years.

MVD

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Market Value Decline – in relation to Credit Rating Agency stresses and assumptions, MVD refers to the percentage by which it is assumed property valuations will decline at particular stress levels, e.g. 45% MVD at AAA rating level

NCCP

National Consumer Credit Protection – Regulations under the National Consumer Credit Protection Act 2009 (Cth) and related legislation which is designed to protect the rights of the individual (personal consumer) by ensuring lenders all adhere to the same rules when providing personal, domestic or household credit.

Net Losses

Gross Defaults less Recoveries received for those Receivable written off.

Non-conforming Loan

A Mortgage Loan which fails to meet traditional lending criteria, e.g. the Obligor has a poor credit history. Historically, the “traditional lending criteria” in Australia is that which was required by the Lenders Mortgage Insurers. The rate Charged on a Non-conforming Loan is higher than the prime or standard rate. Non-conforming Loans are also sometimes referred to as specialist Loans or Sub-prime Loans.

Non-performing

Receivable in Default or close to Default, i.e. the Obligor has not met the terms of the Receivable contract, e.g. not paid on time or in full. The Receivable becomes non-performing at the point it is written off.

Non-resident

A person or corporation that does not meet the criteria for resident as set, for example, by the Australian Taxation Office.

Notice of Default

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Formal notice given to an Obligor that a Default has taken place, and of possible legal action.

Obligor

The person or Debtor liable to the Originator or Seller in respect of Receivables. Also referred to as a Borrower. For consistency, the term Obligor is used throughout this glossary, although the term Obligor is more commonly used in reference to a non-Mortgage Loan, such as a trade receivable or an auto or equipment Loan. Pronounced ‘ob / lee / gor’.

Off-Balance Sheet

An accounting treatment whereby an Originator is enTitled to remove securitised Assets from its own balance sheet.

Offer Document

A document promoting a financial product.

Offering Circular

An Offer Document promoting the sale of Debt Securities, similar to a prospectus. Also known as an Information Memorandum.

Origination

The process of preparing, submitting and evaluating a Receivable application; generally includes a credit check, verification of employment and a property appraisal.

Originator

The party that creates the Receivable which subsequently forms the Assets for the Securitisation, e.g. the ADI or non-bank that writes the Mortgage Loan..

OTC market

Over-the-counter trading, usually conducted via phone or computer networks.

Overcollateralisation

A capital structure in which Assets exceed Liabilities. It is used as a form of Credit Enhancement in certain Securitisations.

Owner-occupied

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Property occupied by the owner as opposed to a tenant or renter.

P&I

Principal & Interest - a Loan in which both the Principal and the Interest are paid during the Term of the Loan.

Pass-through

A structure whereby Principal payments on Debt Securities are made on the basis of Principal Collections on the underlying Assets, i.e. all Principal payments collected on the underlying Assets are passed directly through to investors to repay Debt Securities.

Paying Agent

An entity responsible for making the payment of Interest and Principal to investors on behalf of the Issuer.

Payment Date

The date on which payment of Principal or Coupon to investors of a Class of Debt Securities is scheduled to occur.

Perfection of Title

Refers to the perfection of Legal Title, which enables the perfector (the SPV) to become the full legal and Beneficial Owner rather than just the Beneficial Owner of the Receivables. The Issuer may be required to perfect Title if certain events outlined in the documentation occur (Title perfection events). When Assets are originally only beneficially assigned, that assignment is accompanied by authority (a Power of Attorney) to perfect or protect that equitable Interest in the case of a Title perfection event taking place.

Personal Property

Any form of property other than land or buildings and fixtures which form part of that land. It can include tangibles such cars, boats, machinery, crops; as well as intangibles such as shares, intellectual property and contract rights.

Pool Factor

Outstanding Principal balance of all Assets divided by the original Principal balance of the Assets at Cut-off Date.

Pooling

The assembly of Receivables by an Originator as the basis for issuance of an ABS.

Portability

Where a new property can be used as Security for an existing Loan, i.e. when the Loan is transferred to a new Security property without needing to repay the Loan, reapply or restructure.

Power of Attorney

A written authorisation to another person, or persons, to perform certain acts for the signer, as if they were the signer.

PPSA

Personal Property Securities Act (2009). This is a federal government act, and PPS reforms took place to bring together the different Commonwealth, State and Territory laws and registers under one national system. The PPSA accompanies an online PPS Register.

Pre-funding

Pre-funding occurs when some investor funds are set aside at the start of the transaction to enable the Issuer to gradually increase the value of Receivables underlying the Securitisation, within a specified period of time (called the Pre-funding period). The Pre-funding period is typically around 3 to 6 months, and enables the Originator to originate more Receivables and include then in the Securitisation vehicle, provided they are of similar characteristics to the existing pool. Pre-funding is also referred to as Ramp-up.

Prepayment

Any amount paid to reduce the Principal balance of the Receivable before the due date or any amount paid in addition to the minimum repayment. Receivable Prepayments create uncertainty as to the average life of a pool of Receivables and therefore the average life of Debt Securities issued by a Securitisation vehicle.

Prepayment Penalty

A fee assessed by a lender on an Obligor who repays all or part of the Principal of a Receivable before it is due. The prepayment penalty compensates the lender for the loss of Interest that would have been earned had the Receivable remained in effect for its full Term.

Prepayment Rate

The rate at which the Receivables in discrete pools are reported to have been repaid, expressed as a percentage of the remaining Principal balance of the pool. Different Receivables may demonstrate different prepayment behaviours, and different market conditions (e.g. Interest rates) may impact prepayment speeds.

Prepayment Risk

Risk that the Receivables underlying the Debt Security are repaid faster or slower than expected.

Pricing Date

Date on which price, yield or Margin is determined.

Prime Loan

A Mortgage Loan which meets traditional lending criteria, whereby the underwriting process includes full income verification and the Obligor has a sound credit history. Historically, the “traditional lending criteria” in Australia is that which was required by the Lenders Mortgage Insurers, and hence a significant number of prime Loans in Australian Securitisations are Mortgage insured.

Principal

Amount borrowed or owed.

Principal & Interest

P&I - a Loan in which both the Principal and the Interest are paid during the Term of the Loan.

Principal Draw

Principal Collections used to pay required Trust expenses and Coupon payments, due to insufficient income Collections. This is a form of Liquidity Enhancement.

Promissory Note

Also referred to as Commercial Paper or CP, it is a short-Term, unsecured Debt instrument with a fixed maturity where the Issuer promises to pay a determinate sum of money to the buyer, under specific terms. Since it is not backed by Collateral, only firms with strong Credit Ratings from a Credit Rating Agency will be able to sell a promissory note at a cost-effective price. A promissory note is usually sold at a Discount to Face Value, and carries higher Interest repayment rates than Bonds.

Pro-rata Pay

Serial Pay - Principal receipts are allocated to senior and subordinate Classes of Debt Securities according to their original percentages.

Prudential Standards

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APRA Prudential Standards – these standards form part of the framework under which APRA supervises and regulates ADIs. One of the key standards that impacts Securitisation by ADIs is APS 120 (Securitisation).

Ramp-up

Ramp-up occurs when some investor funds are set aside at the start of the transaction to enable the Issuer to gradually increase the value of Receivables underlying the Securitisation, within a specified period of time (called the ramp-up period). The ramp-up period is typically around 3 to 6 months, and enables the Originator to originate more Receivables and include then in the Securitisation vehicle, provided they are of similar characteristics to the existing pool. Ramp-up is also referred to as Pre-funding.

Rapid Amortisation

A period that may follow the Revolving Period of a transaction, during which the outstanding balance of the related Debt Securities is repaid as quickly as possible from Collections received. If a performance trigger event occurs, rapid amortisation will be likely, to return Principal to investors as quickly as possible.

Real Estate

Land and all physical property on, below or attached to the land. Houses, sewers, trees and fences are all Real Estate.

Real Money Investors

Investors that are investing cash, rather than investing in order to trade or use the Debt Securities for some other purpose (e.g. arbitrage, liquidity management). Real Money Investors include superannuation funds, fund managers and insurance companies.

Receivable

A financial contract under which the Obligor owes Principal and Interest on its Debt to the lender. Within a Securitisation, the receivable is an Asset of the SPV. Examples typically include Mortgage Loans, other personal or corporate Loans, Leases, and hire purchases.

Recourse

The ability of a lender/Secured Creditor to demand payment from an Obligor/Debt Issuer if the Collateral is insufficient to pay the Debt in full. In the case of securitised issues, Recourse is limited to the Assets of the Issuer/SPV, and does not extend to other Assets of the Originator.

Recoveries

Recoveries include proceeds from the sale of the property or physical Asset underlying the RReceivable, as well as any other recoveries (e.g. LMI) received prior to the Receivable being written off.

Redemption

Redemption occurs when the Debt Securities can be redeemed (effectively bought back by the Issuer/Trustee) prior to the Legal Maturity Date. This may be at the option of one of the transaction parties (Call Option), or upon certain events being triggered.

Redraw

A feature of some variable rate Mortgage Loans whereby you can make extra repayments, and then draw on these funds if required. The Redraw available to the Obligor is Scheduled Balance less Current Balance.

Refinance

To pay off a Debt and arrange for a new Debt, sometimes with a different lender.

Reg AB Issue

An ABS issue registered in the US with the Securities Exchange Commission. Regulation AB is a set of rules and amendments that address the registration, disclosure and reporting requirements for ABS. Investors in Reg AB issues are domiciled in many jurisdictions, including the US.

Reg S Issue

Debt Securities offered to European and Asian investors (and US off-shore investors). These issues are settled through Euroclear or Clearstream and listed on a European exchange. They are usually denominated in USD or Euros.

Reimbursements

Funds used to reinstate Charge-offs on Debt Securities.

Reinvestment Risk

The risk that the yield on an investment will be adversely affected if the Interest rate at which interim cash flows can be reinvested is lower than expected.

Representations and Warranties

Statements generally made by the Originator or Seller in respect of the Receivables. The transaction documentation usually provides for certain remedies if representations and warranties are breached.

Reserve Account

A funded account available for use by an SPV for one or more specified purposes. A reserve account is often used as a form of Credit Enhancement or Liquidity Enhancement. Usually reserve accounts are at least partially funded at the start of the related transactions, but many are designed to be built up over time using the excess cash flow that is available after making payments to Secured Creditors.

Residential Mortgage-backed Securities

RMBS - a Debt Security whose cash flow is backed by the Principal and Interest payments from a specified pool of Mortgage Loans that are secured by Mortgages over residential property.

Residual Income Unit

The unitholder is entitled to any cash flow from the Assets that remains after the obligations to all other Secured Creditors have been met.

Residual Value

The estimated value of Personal Property at the end of a Lease period. Lease payments are based on the difference between the property’s sale price and residual value. If the property is not worth the estimated residual value at the end of the Lease, then the Obligor may have to make up the price difference by making a residual payment. This concept generally relates to Leases over vehicles or equipment.

Restructured Asset

Receivables where the contract payment terms have been restructured.

Revolving Period

Principal receipts from the underlying Receivables are used to reinvest in additional Receivables rather than passing through to investors. This is usually used to finance short-dated RReceivables such as trade receivables. The ‘Revolving Period’ is at the start of the transaction. The ‘amortisation period’ can commence on a predetermined date, or may start early if certain performance provisions are triggered.

Ring-fence

In Securitisation, this refers to the transfer of Receivables to an SPV so the Assets are protected and are independent of the Originator and are thus Bankruptcy-remote / Insolvency-remote.

Risk Retention

In Securitisation it refers to Originators and/or securitisers retaining an unhedged position either in the Debt Securities issued or in the underlying Receivable pool from which the securitised Receivables were drawn. Sometimes referred to as skin in the game

RMBS

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Residential Mortgage-backed Security – Debt Security whose cash flow is backed by the Principal and Interest payments from a specified pool of Mortgage Loans that are secured by Mortgages over residential property.

Scheduled Loan Balance

The expected Principal balance of the Loan assuming only contractual repayments have been made when due (i.e. excluding any Prepayments that may have been made).

Scheduled Balance Arrears Methodology

Under this approach, a Mortgage Loan is only classified as being in Arrears in the Current Loan Balance exceeds the Scheduled Loan Balance, irrespective of whether an Obligor has any scheduled payments past due.

Scheduled Interest

The amount of Interest owed at the end of the current period.

Scheduled Principal

The amount of Principal scheduled to be repaid at the end of the current period.

Seasoned Mortgage

A Mortgage that has been in effect at least [one] year and on which Principal and Interest payments are being made on time.

Seasoning

The age of the Receivable or Debt Security.

Second Mortgage

A Mortgage Loan granted when there is already one other Mortgage registered against the property. In case of Default, the first Mortgage is paid from the proceeds of the sale of the property, before the second Mortgage is paid.

Secured Creditors

A creditor with the benefit of a Security Interest over some or all of the Assets of the SPV. If an Event of Default occurs, the Secured Creditor can enforce Security against the Assets of the SSPV. In a Securitisation, Secured Creditors generally include investors, hedge providers, liquidity providers, etc.

Securitisation

The process of converting cash flows from Assets/Receivables into Debt Securities that are limited in their Recourse to the underlying Assets/RReceivables rather than the company that originated those Assets/Receivables.

Security

A written promise to pay a stipulated sum of money to a specified party under conditions mutually agreed upon and secured by Collateral. Throughout this glossary, Bonds, notes, and any other forms of securitised Debt issuance, are referred to as Debt Securities.
The term Security also relates to the property that will be pledged as Collateral for a Mortgage Loan.

Security Trust Deed

Under this deed, the SPV grants a Charge in favour of the Security Trustee for the benefit of the investors and facility providers, and sets out the Waterfall in the event of a Default by the SPV.

Security Trustee

The entity that holds Assets in Trust for Secured Creditors in a financial transaction such as a Securitisation. The security trustee has a Charge over the Trust Assets, and may enforce the Charge if an Event of Default occurs.

Segregated Issuer

The Issuer issues separate series of Debt Securities, which are not linked to each other and cannot cause cross-Default.

Seller

The party that sells Receivables to the SPV. The Seller may have originated the Receivables itself (in which case it is also the Originator), or it may have purchased the RReceivables from another party prior to securitising them.

Sequential Pay

Principal receipts are allocated to the most senior Class of Debt Securities and only when that Class is repaid in full are allocated to the next most senior Class of Debt Securities.

Serial Pay

Pro-rata Pay - Principal receipts are allocated to senior and subordinate Classes of Debt Securities according to their original percentages.

Serviceability

Ability of an Obligor to make and meet repayments on a Receivable, based on the Obligor’s expenses and income.

Servicer

The entity responsible for administering securitised Receivables. This will include collection of Principal and Interest on the Receivables, and distribution of those funds to the Trustee.

Servicing Fee

The amount withheld from Interest payments made on the Receivables which is retained by the Servicer as payment for servicing the Receivables.

Settlement Date

This can refer to the settlement of a Receivable or the issuing of Debt Securities. It is the date on which:

and the new owner/investor takes possession. It is at this time that the Obligor/Issuer takes on the Receivable or Debt Security obligation and pays all closing costs. In the case of an Asset sale, it is also the date that the Obligor receives Title from the Seller. Also referred to as Closing Date.

Shelf Registration

A registration of a new issue which can be prepared several years in advance, so that the issue can be offered quickly as soon as funds are needed or market conditions are favourable. A single registration document can be filed by a company that permits the issuance of multiple Debt Securities.

Short-Term Debt Security

A Debt Security with a maturity of one year or less.

SPC

Special Purpose Company -  an Insolvency-remote company created solely to hold Assets on behalf of Secured Creditors, and issue Debt Securities supported by securitised cash flows. Also referred to as SPV.

SPE

Special Purpose Entity – an Insolvency-remote entity created solely to hold Assets on behalf of Secured Creditors, and issue Debt Securities supported by securitised cash flows. Also referred to as SPV.

Special Purpose Company

SPC - an Insolvency-remote Trust or company/entity created solely to hold Assets on behalf of Secured Creditors, and issue Debt Securities supported by securitised cash flows. Also referred to as SPV.

Special Purpose Entity

SPE -  an Insolvency-remote entity created solely to hold Assets on behalf of Secured Creditors, and issue Debt Securities supported by securitised cash flows. Also referred to as SPV.

Special Purpose Vehicle

SPV – an Insolvency-remote Trust or company/entity created solely to hold Assets on behalf of Secured Creditors, and issue Debt Securities supported by securitised cash flows.

Split-Loan

A combination of Loan types forming one Loan, such as a Loan which has a Fixed-rate portion and a Variable-rate portion. Each of the Loans is usually secured by the same properties.

Sponsor

Entity that organises a Securitisation transaction by selling or transferring Receivables that it originated or acquired.

SPV

Special Purpose Vehicle – an Insolvency-remote Trust or company/entity created solely to hold Assets on behalf of Secured Creditors, and issue Debt Securities supported by securitised cash flows.

Stamp Duty

A state government tax imposed on legal documents and commercial transactions. For the purchase of Real Estate, it is calculated according to the property value. It also applies to the amount of the Mortgage.

Stated Amount

The total Principal balance of a Class of Debt Securities after deducting Charge-offss and adding Reimbursements.

Static Pool

A pool of Receivables made up of Receivables originated only during a finite period of time, usually a month or a quarter. Analysing Receivables pools in static pools provides additional insights into how a securitised pool may perform over time, for instance its repayment profile and Loss Curve.

Step-down

Principal Collections can be passed through to more subordinated Classes of Debt Securities (even if senior Debt Securities have not been repaid in full), provided certain “step-down triggers” are being met. Such step-down triggers often include the passing of a period of time, and the maintenance of Arrears below certain levels.

Step-up Date

The date upon which there is to be an increase in the Coupon payable.

Step-up Margin

The increased Interest rate (above the original Margin set) that Issuers agree to pay investors.

Stressed Loss Assumption

The Base Case Loss Assumption adjusted to reflect a stress multiple.

Subordinated Debt Security

Debt Security which ranks behind other Debt Securities in repayment of Principal, and is allocated losses before senior Debt Securities.

Subordination

A form of Credit Enhancement where several Classes of Debt Securities are issued, each with different Waterfall rankings. Subordination refers to the Debt Securities which rank below a certain Debt Security, thereby providing it with Credit Enhancement equal to the Face Value of those Subordinated Debt Securities Losses and shortfalls are allocated to the most Subordinated Debt Securities first. Subordination is also referred to as credit tranching.

Sub-prime

A Receivable which fails to meet traditional lending criteria, e.g. the Obligor has a poor credit history. Historically, the “traditional lending criteria” in Australia relating to Mortgage Loans is that which was required by the Lenders Mortgage Insurers. The rate charged on a sub-prime Receivable is higher than the prime or standard rate. Sub-prime Receivables are also sometimes referred to as specialist or Non-conforming.

Substitution Period

If an underlying Receivable is sold out of the pool because it doesn’t meet eligibility criteria, funds are used to reinvest in additional Receivables rather than passing through to investors. This is usually used to finance long-dated Receivables such as Mortgage Loans for up to 2 years at the start of the transaction (the “substitution” period).

Super Senior Debt Security

A Debt Security with a high Credit Rating issued as part of a Securitisation structure that has another Class of Debt Securities with the same Credit Rating, but that ranks lower in the Waterfall.

Swap

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An agreement by two parties used to limit market risk by exchanging sets of payments that are each based on a different risk basis, e.g. a fixed/floating Interest rate swap requires one party to pay fixed Interest rate payments and receive floating/variable Interest rate payments.

Talon

A certificate attached to a Bond used by the investor to order new Coupons upon depletion.

Tenor

The number of years until the maturity of Debt or repayment of a Receivable. Also referred to as Term.

Term

The number of years until the maturity of Debt or repayment of a Receivable. Also referred to as Tenor.

Term Issue

An issue of Debt Securities to the capital markets whereby the Debt Securities have a specified maturity date and the pool is effectively a closed pool, i.e. further Assets cannot be added to the pool over time (this has some exceptions, e.g. term issues with Substitution or Ramp-up periods). A term issue may follow the build-up of Receivables on balance sheet, or in a Warehouse Facility.

Threshold Rate Mechanism

The Manager is required to set the Interest rate on the Variable-rate Loans at a level that meets the obligations of the SPV.

Timely Payment Cover

TPC - insurance offered by Lenders’ Mortgage Insurers to cover missed Interest payments by obligors for up to 24 months. A form of Liquidity Enhancement.

Title

A legal document evidencing a person’s right to or ownership of a property.

Title Insurance

The insurance that protects the Mortgage company, along with the homeowner, if an owner’s policy is purchased against losses resulting from problems with the Title of a property, or unknown liens (Charges) or other inconsistencies relating to the Title of the property.

Title Perfection

Refers to the perfection of Legal Title, which enables the perfector (the SPV) to become the full legal and beneficial owner rather than just the beneficial owner of the Receivables. The Issuer may be required to perfect Title if certain events outlined in the documentation occur (Title perfection events). When Assets are originally only beneficially assigned, that assignment is accompanied by authority (a Power of Attorney) to perfect or protect that equitable interest in the case of a Title perfection event taking place.

Title Search

A check of public records to be sure that the Seller is the recognised owner of the Real Estate and that there are no unsettled liens or other claims against the property.

Top-up

A Loan in which the Obligor extends the amount of credit secured. Top-up may also refer to a Substitution or Ramp-up of a Securitisation pool of Receivables.

Torrens System

System whereby ownership and all dealings on a property are detailed on the one document, i.e. a Certificate of Title or Deed of Grant. Under this system a Mortgage is a Charge or encumbrance on the Title. Registration is compulsory to effect legal transfer of an Interest in property and each time the property is sold, Mortgaged or a Mortgage discharged, the transaction is recorded on the Certificate of Title.

TPC

Timely Payment Cover - insurance offered by Lenders’ Mortgage Insurers to cover missed Interest payments by obligors. A form of Liquidity Enhancement.

Tranche

One of a series of Debt Securities secured by a single pool of Receivables. The tranches have different terms and conditions and rank in different orders in the payment Waterfall, leading to each tranche having varying levels of Credit Risk. Different tranches can be denominated in different currencies and have differing maturity dates. Also referred to as a Class.

Trigger Event

The occurrence of an event which indicates that the financial condition of the Issuer or some other party associated with the transaction is deteriorating; typically, such events are defined in the transaction documents, as are the changes to the transaction structure and/or priority of payments that are mandated following the occurrence of such an event.

True Sale

An actual sale, as distinct from a secured borrowing, so that the Receivables owned by the SPV are not consolidated with the Originator, Seller or Sponsor.

Trust

An arrangement whereby securitised Receivables and other Assets (such as Cash Reserves) are held in Trust by a Trustee with the intention that they be administered for the benefit of a beneficiary/Secured Creditors.

=Trustee

In Australia, a Securitisation structure generally has 2 trustees: the Issuer Trustee and the Security Trustee. The trustee is the entity that represents the interests of investors and other Secured Creditors, and holds Assets and/or a Charge over the Assets on behalf of investors and other Secured Creditors.

Turbo Structure

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Uses excess spread to retire Debt Securities faster than scheduled. Builds Credit Enhancement by creating and increasing Overcollateralisation.

Unconsolidated Loan Count

Number of Loans in the pool before consolidating Split-Loans that are secured by the same properties.

Underlying Security

The securitised Receivables acquired by the SPV, e.g. residential Mortgage Loans, credit card Loans and auto Loans.

Underwriting

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The process of analysing a Receivable application to determine the amount of risk involved in writing the Receivable contract; it includes a review of the potential Obligor’s credit history and a judgment of the property or other physical Asset values.

Valuation

An estimate of the market value of a piece of Real Estate made by a competent professional (the valuer) who knows local property market and prices. Also known as an ‘appraisal’.

Valuer

Also known as an ‘appraiser’, an individual qualified by education, training and experience to estimate the value of real property and personal property. Although some valuers work directly for Mortgage lenders, most are independent.

Variable-rate

The rate of Interest is variable or adjustable for the Term of the Receivable, or Debt Security issue, referenced against a market reference rate, e.g. BBSW.

Veda Advantage

The company which records and holds credit information and credit Defaults. Was originally known as ‘CRAA’, and then BayCorp Advantage, and may be referred to as the ‘CRAA check’.

Vintage

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Refers to a portfolio of Receivables originated within a specified time period (usually refers to a calendar year, e.g. the 2006 vintage).

WAL

Weighted Average Life – the average remaining Term to maturity of the underlying Receivables, weighted by remaining Principal balance. Also called WAM.

WAM

Weighted Average Maturity - the average remaining Term to maturity of the Receivables, weighted by remaining Principal balance. Also called WAL.

Warehouse Facility

An issue of Debt Securities, to a warehouse funder (typically a bank), under a warehouse facility structure, whereby the Originator has the ability to continue to add Receivables into the pool, to build the volume up to a size at which they can “term out” (i.e. do a Term Issue). The warehouse facility is subject to a number of conditions, including Eligibility Criteria around what type of Receivables can be funded by the Warehouse. The warehouse facility is usually for a Term of 1 year, at which point it may be rolled over for another year as required.

Waterfall

The waterfall, also called the “priority of payments” is set out in the transaction documents, and details the allocation of cash by the Trustee each Determination Date, in order of priority. There is generally an Interest waterfall, a Principal waterfall pre-Event of Default and a Principal waterfall post- Event of Default).

Weighted Average Cost of Funds

The average Interest rate for a group of Debt SecuritiesDebt Securities>Debt Security in the group by a fraction, the numerator of which is the outstanding Principal balance of the related Debt Security and the denominator of which is the outstanding Principal balance of the entire group of Debt Securities. An important concept in tranched Securitisation structures is that the weighted average cost of funds tends to increase over time, as the cheaper senior Debt Securities retire, leaving the more expensive subordinated Debt Securities outstanding.

Weighted Average Life

WAL - the average remaining Term to maturity of the Receivables or Debt Securities, weighted by remaining Principal balance. Also called Weighted Average Maturity.

Weighted Average Maturity

WAM - the average remaining Term to maturity of the Receivables, weighted by remaining Principal balance. Also called Weighted Average Life.

Withholding Tax

A tax that is withheld from income and passed on to a government.

Write-off

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A Debt that is unlikely to be repaid and is written off as a Default.

Yield Shortfall

The opposite of excess spread. Indicates that insufficient spread is available from the Assets to pay the SPV’s costs and the Interest portion of Debt service in full. A potential yield shortfall may be mitigated by the SPV having access to cash collateral in a Reserve Account. Cash flow analysis helps to identify potential yield shortfalls under various scenarios. This may be a particular risk in Pass-through structures, as the cheaper senior Debt is repaid, leaving the more expensive subordinated Debt outstanding.

Yield to Maturity

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Rate of return of a Debt Security, for example, if held until it matures, usually expressed as an annual percentage.

What's On

Upcoming courses, seminars and networking opportunities for your professional development

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Trust Management Master Class

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Australian Securitisation Journal

The Australian Securitisation Journal (ASJ) is the official journal of the Australian Securitisation Forum. The ASJ is published by KangaNews on a semi-annual basis.

Read the official journal of the ASF

Market snapshot

View a snapshot of the Australian structured credit market, courtesy of Macquarie Debt Markets Research. Key data is refreshed on a monthly basis.

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