Yield shortfall is the difference between the expected yield on a securitisation and the actual yield. Yield shortfall is sometimes referred to as "yield deficiency".
Yield shortfall can occur for a number of reasons, including:
- Defaults on the underlying assets.
- Prepayments of the underlying assets.
- Changes in interest rates.
- Changes in the credit rating of the securitisation.
Yield shortfall can have a significant impact on the performance of a securitisation. If the yield shortfall is too large, 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 yield shortfall in securitisation:
- To assess the risk of the securitisation: Yield shortfall can be used to assess the risk of the securitisation. If the yield shortfall is too large, then the securitisation is more likely to default.
- To manage the risk of the securitisation: Yield shortfall can be used to manage the risk of the securitisation. For example, the issuer may want to include a yield shortfall provision in the securitisation documents. This provision would allow the issuer to recover some of the losses from the investors if the yield shortfall is too large.
- To price the securitisation: Yield shortfall can be used to price the securitisation. The yield shortfall will be reflected in the interest rate that the investors receive on the securitisation.
Yield shortfall is a valuable tool for securitisation issuers and investors. It can be used to assess the risk of the securitisation, manage the risk of the securitisation, and price the securitisation.
Yield shortfall is sometimes referred to as "yield deficiency".