A write-off is the process of removing a defaulted asset from the securitisation pool. In Australian English, a write-off is sometimes referred to as a "charge-off".
A write-off is typically done when the probability of recovery of the asset is deemed to be low. When an asset is written off, the securitisation issuer will no longer receive any payments from the underlying borrower.
Write-offs can have a significant impact on the performance of a securitisation. If too many assets are written off, the securitisation may not be able to generate enough cash flow to repay the investors. This could lead to a default on the securitisation.
Here are some of the applications of write-offs in securitisation:
- To reduce the risk of the securitisation: Write-offs can help to reduce the risk of the securitisation by removing defaulted assets from the pool. This will help to protect the investors in the securitisation from losses.
- To improve the performance of the securitisation: Write-offs can help to improve the performance of the securitisation by reducing the amount of debt that is outstanding. This will free up cash flow that can be used to repay the investors.
- To manage the risk of the securitisation: Write-offs can be used to manage the risk of the securitisation by adjusting the size of the tranches. For example, if a large number of assets are written off, then the issuer may need to reduce the size of the senior tranches to protect the investors.
Write-offs are a valuable tool for securitisation issuers. They can help to reduce the risk of the securitisation, improve the performance of the securitisation, and manage the risk of the securitisation.
A write-off is sometimes referred to as a "charge-off".