The Role of Triggers in Net Interest Margin (NIM) Securitization Structures

Abstract

One of the keys to understand how net interest margin securities, or NIMs, are structured is to understand how the “triggers” from the underlying asset-backed transaction work. The purpose of this article is to explain those triggers and their impact on the residual cash flows to a NIM. Triggers have an impact on the reallocation of cash flows in a securitization structure, which in turn can impact the amount of excess spread allocated to the residual holder. Triggers could require an increase in the target overcollateralization (O/C), known as a “step-up” event or they could prevent a release of O/C, or “step down” event. The two primary cash flow triggers are a delinquency trigger and a cumulative loss trigger. “NIM friendly” triggers are triggers where there is no step-up in O/C above the initial O/C and the trigger does not come into effect until the step-down date. Depending on where an investor participates in the capital structure, whether it is in senior, mezzanine, subordinate or first-loss positions, the view on a particular trigger can be very different.