A talon is a document that entitles the holder to receive additional securities or cash. Talons are often used in securitisations that have a call option or a put option.
A call option gives the issuer the right to repurchase the securitisation at a specified price on a specified date. If the issuer exercises the call option, the holders of the securitisation will be entitled to receive a talon that entitles them to receive cash or additional securities.
A put option gives the holders of the securitisation the right to sell the securitisation back to the issuer at a specified price on a specified date. If the holders exercise the put option, the issuer will be obliged to repurchase the securitisation and the holders will be entitled to receive a talon that entitles them to receive cash or additional securities.
A talon is sometimes referred to as a "warrant" or a "certificate".
Here are some of the applications of talons in securitisation:
- To provide flexibility: Talons give the issuer and the holders of the securitisation flexibility. The issuer can exercise the call option if it wants to reduce its exposure to the securitisation. The holders of the securitisation can exercise the put option if they want to sell the securitisation and exit their investment.
- To provide additional credit enhancement: Talons can be used to provide additional credit enhancement to a securitisation. This is because the holders of the talons have a claim on the issuer if the securitisation defaults.
- To create new products: Talons can be used to create new securitisation products that meet the needs of different investors. For example, talons can be used to create securitisations that have different maturities or that are exposed to different types of risk.
It is important to note that talons are complex financial instruments and there are a number of risks associated with them. Investors should carefully understand the risks before investing in securitisations with talons.