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Pro-rata Pay

  • Pro-rata pay is a method of distributing principal payments to investors in a securitisation.
  • Under a pro-rata pay structure, all investors receive the same percentage of their principal investment each time a principal payment is made.
  • This means that investors with larger principal investments will receive larger principal payments, and investors with smaller principal investments will receive smaller principal payments.

There are a number of applications of pro-rata pay in securitisation, including:

  • To ensure that all investors are treated fairly: Pro-rata pay ensures that all investors are treated fairly, regardless of the size of their principal investment.
  • To reduce the risk of default: Pro-rata pay can help to reduce the risk of default in a securitisation. This is because all investors are exposed to the same amount of risk, regardless of the size of their principal investment.
  • To simplify the securitisation structure: Pro-rata pay can simplify the securitisation structure, as it does not require the creation of different classes of securities with different payment priorities.

Here are some examples of how pro-rata pay is used in securitisation:

  • Mortgage-backed securities: In a mortgage-backed security, the underlying assets are mortgages. The borrowers on the mortgages make monthly principal and interest payments to the issuer of the securitisation. The issuer then uses these payments to pay the interest on the securities and to repay the principal of the securities on a pro-rata basis.
  • CDO: In a collateralized debt obligation, the underlying assets can be a variety of debt instruments, such as mortgages, corporate bonds, and loans. The borrowers on the underlying assets make monthly principal and interest payments to the issuer of the CDO. The issuer then uses these payments to pay the interest on the securities and to repay the principal of the securities on a pro-rata basis.

Pro-rata pay is a common method of distributing principal payments in securitisation, and it has a number of advantages.

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