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Turbo Structure

A turbo structure is a type of securitisation that uses a credit derivative to provide credit enhancement. A turbo structure is sometimes referred to as a "turbo securitisation" or a "turbo trust".

A credit derivative is a financial instrument that transfers the credit risk of an underlying asset from one party to another. In a turbo structure, the credit derivative is used to protect the investors in the securitisation from losses if the underlying assets default.

The turbo structure works as follows:

  1. The originator sells the underlying assets to a special purpose vehicle (SPV).
  2. The SPV issues securities to investors.
  3. The SPV enters into a credit derivative with a credit protection seller.
  4. The credit protection seller agrees to pay the SPV if the underlying assets default.

The turbo structure provides credit enhancement to the securitisation by ensuring that the investors will be paid even if the underlying assets default. This is because the credit protection seller will pay the SPV if the underlying assets default, and the SPV will then use these funds to pay the investors.

Here are some of the applications of turbo structures in securitisation:

  • To provide credit enhancement: Turbo structures can be used to provide credit enhancement to securitisations. This can make the securitisations more attractive to investors, as they will be less exposed to losses if the underlying assets default.
  • To reduce costs: Turbo structures can be used to reduce the costs of securitisation. This is because the credit protection seller will typically charge a lower premium than the issuer would have to pay if the credit enhancement was provided by a traditional method, such as overcollateralisation.
  • To improve liquidity: Turbo structures can be used to improve liquidity. This is because the credit protection seller will typically provide a liquidity facility to the SPV. This means that the SPV will be able to sell the credit derivative if it needs to, which will make it easier to sell the securitisation to investors.

Turbo structures are a valuable tool for securitisation. They can be used to provide credit enhancement, reduce costs, and improve liquidity.

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