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Non-performing

A non-performing asset (NPA) is an asset that is not generating income or cash flow. NPAs can include loans, bonds, and other financial instruments.

NPAs can arise for a variety of reasons, such as:

  • The borrower has defaulted on the loan.
  • The borrower has filed for bankruptcy.
  • The value of the asset has declined below the amount of the loan.

NPAs can be a significant risk to securitisation transactions. This is because NPAs can reduce the amount of cash flow that is available to pay the investors in the securitisation.

There are a number of ways to manage the risk of NPAs 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 NPAs.

Another way to manage the risk of NPAs 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.

NPAs can also be sold to a third party. This is known as distressed asset trading. Distressed asset traders specialize in buying NPAs at a discount and then trying to recover their investment.

Here are some of the applications of non-performing assets in the context of securitisation:

  • Pricing: NPAs can be used to price the securities that are issued in a securitisation transaction. The higher the percentage of NPAs in a securitisation, the lower the price of the securities will be.
  • Risk management: NPAs can be used to manage the risk of a securitisation transaction. By understanding the risk of NPAs, investors can make informed decisions about whether or not to invest in a securitisation transaction.
  • Regulation: NPAs can be used to regulate securitisation transactions. Regulators can use NPAs to set limits on the amount of debt that can be issued in a securitisation transaction.

Overall, NPAs can be a significant risk to securitisation transactions. However, there are a number of ways to manage the risk of NPAs. By understanding the risks associated with NPAs, investors can help to protect themselves from losses.

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