Net losses are the losses that are incurred by investors in a securitisation transaction after all of the payments from the underlying assets have been received. Net losses can occur for a variety of reasons, such as defaults on the underlying assets, changes in interest rates, or changes in the economic outlook.
Net losses are an important consideration in securitisation transactions because they can affect the returns that investors receive. If the net losses are high, investors may not receive all of their investment back.
There are a number of ways to mitigate the risk of net losses in securitisation transactions. One way is to overcollateralize the transaction. This means that the value of the underlying assets is greater than the amount of debt that is issued. This will help to protect investors in the event that there are net losses.
Another way to mitigate the risk of net losses is to use credit enhancement. Credit enhancement is a mechanism that is used to protect investors from losses. There are a number of different types of credit enhancement, such as excess spread, reserve funds, and letters of credit.
Net losses are an important risk factor in securitisation transactions. However, there are a number of ways to mitigate the risk of net losses. By using overcollateralization and credit enhancement, investors can help to protect themselves from losses in the event that there are net losses.
Here are some of the applications of net losses in the context of securitisation:
- Pricing: Net losses can be used to price the securities that are issued in a securitisation transaction. The higher the net losses, the lower the price of the securities will be.
- Risk management: Net losses can be used to manage the risk of a securitisation transaction. By understanding the risk of net losses, investors can make informed decisions about whether or not to invest in a securitisation transaction.
- Regulation: Net losses can be used to regulate securitisation transactions. Regulators can use net losses to set limits on the amount of debt that can be issued in a securitisation transaction.
Overall, net losses are an important risk factor in securitisation transactions. By understanding net losses, investors can help to protect themselves from losses.