- Ramp-up is the process of gradually increasing the amount of principal that is repaid to investors in a securitisation.
- Ramp-up typically occurs in the early years of a securitisation, as the underlying assets are still being repaid.
- The amount of principal that is repaid to investors each month will gradually increase over time, until it reaches the full amount of principal that is outstanding.
There are a number of applications of ramp-up in securitisation, including:
- To manage cash flow: Ramp-up can help to manage the cash flow of a securitisation. This is because the issuer of the securitisation can use the initial principal payments to cover the costs of the securitisation, such as the fees paid to the arrangers and the servicer.
- To reduce risk: Ramp-up can help to reduce the risk of default in a securitisation. This is because the issuer of the securitisation will have more time to build up a reserve of cash before the full amount of principal is due to be repaid.
- To attract investors: Ramp-up can help to attract investors to a securitisation. This is because investors are typically more willing to invest in a securitisation that has a predictable cash flow.
Here are some examples of how ramp-up is used in securitisation:
- Mortgage-backed securities: In a mortgage-backed security, the underlying assets are mortgages. The borrowers on the mortgages make monthly principal and interest payments to the issuer of the securitisation. The issuer then uses these payments to pay the interest on the securities and to repay the principal of the securities on a ramp-up basis.
- CDO: In a collateralized debt obligation, the underlying assets can be a variety of debt instruments, such as mortgages, corporate bonds, and loans. The borrowers on the underlying assets make monthly principal and interest payments to the issuer of the CDO. The issuer then uses these payments to pay the interest on the securities and to repay the principal of the securities on a ramp-up basis.
Ramp-up is a common process in securitisation, and it can help to manage the cash flow and reduce the risk of a securitisation.