Excess spread is an important consideration for investors in securitisations. A high level of excess spread indicates that the securitisation is likely to be financially secure, as there will be a buffer between the interest income generated by the underlying assets and the interest payments made to investors. However, it is important to note that excess spread can fluctuate over time, so it is important to monitor the level of excess spread on a regular basis.
Here are some of the factors that can affect excess spread:
- The type of underlying assets: The type of underlying assets will affect the amount of interest income generated. For example, securitisations that are backed by residential mortgages typically generate more interest income than securitisations that are backed by commercial mortgages.
- The interest rate environment: The interest rate environment will affect the amount of interest payments made to investors. For example, if interest rates rise, the interest payments made to investors will increase, which will reduce the amount of excess spread.
- The credit quality of the underlying assets: The credit quality of the underlying assets will affect the risk of losses. For example, securitisations that are backed by high-quality assets are less likely to experience losses, which will help to protect the excess spread.