Controlled Amortisation is a securitisation structure in which the principal amount of the underlying assets is repaid in a predetermined manner. This is done to reduce the risk of prepayment, which can be harmful to investors in securitisations.
There are two main types of controlled amortisation structures:
- Sequential amortisation: In a sequential amortisation structure, the principal amount of the underlying assets is repaid in a sequential order. This means that the first tranche of securities to be repaid is the most senior tranche, followed by the second tranche, and so on.
- Pro Rata amortisation: In a pro rata amortisation structure, the principal amount of the underlying assets is repaid pro rata to the outstanding balance of each tranche. This means that each tranche of securities is repaid at the same rate, regardless of its seniority.
Controlled amortisation structures can be a good way to reduce the risk of prepayment for investors in securitisations. However, they can also reduce the liquidity of the securities, as investors may be less willing to trade securities that are not repaying principal.