- Pre-funding is a process in which the issuer of a securitisation transaction deposits cash or other assets into a trust account before the securitisation transaction closes.
- The purpose of pre-funding is to ensure that there are sufficient funds available to make payments to the investors in the securitisation, even if the underlying assets do not generate enough cash flow.
- Pre-funding can be done in a number of ways, including:
- The issuer can deposit cash into the trust account.
- The issuer can sell assets to the trust account.
- The issuer can issue debt to the trust account.
Here are some of the applications of pre-funding in securitisation:
- To mitigate risk: Pre-funding can help to mitigate the risk of default by the issuer. If the issuer defaults, the investors will still have access to the funds in the trust account.
- To improve liquidity: Pre-funding can help to improve the liquidity of the securitisation. If the issuer needs to make payments to the investors before the underlying assets generate enough cash flow, the funds in the trust account can be used to make those payments.
- To reduce costs: Pre-funding can help to reduce the costs of the securitisation. If the issuer does not have to borrow money to make payments to the investors, the securitisation will be less expensive.
Overall, pre-funding is an important tool in securitisation. It mitigates risk, improves liquidity, and reduces costs.