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					       Structured Finance
       Glossary of Securitization Terms

Introductory Note
This glossary aims to provide a comprehensive list of terms currently used in securitization, with short definitions, for the benefit of
investors and professionals with an interest in structured finance. With the market across Europe growing, Standard & Poor's Ratings
Services plans to publish translations in other major languages beginning with an Italian edition.

(Editor's note: Any structured finance acronyms not spelt out on first reference are defined in the glossary.)
Securitization Terms

A                                                               borrower has in the asset that secures the loan. The
                                                                higher the advance rate, the less equity the borrower has
                                                                at stake and the less protection is available to the lender
A Notes
A tranche of an ABS or MBS issue that is senior to other        by virtue of the security arrangement.
tranches, such as the class B notes, in credit terms, as well
                                                                Adverse Selection
as in priority of repayment of principal.
                                                                The process by which the risk profile of an asset pool is
Adjustable Rate Mortgage (ARM) Loan                             assumed to worsen over time because of the presumption
A mortgage loan whose interest rate is adjusted                 that those borrowers who are more creditworthy are the
periodically based on a specified index rate.                   ones who are more likely to prepay their loans.

Administrator                                                   Agency Securities
An agent responsible for managing a CP conduit or an            Securities issued by either Ginnie Mae, Fannie Mae, or
SPE. An administrator's responsibilities may include            Freddie Mac that are backed by mortgage loans and
maintaining the bank accounts into which payments               enjoy credit protection based on an explicit guarantee
received from securitized assets are deposited, making          from the U.S. government in the case of Ginnie Mae
payments to the investors using this cash flow, and             securities or an implicit guarantee from the U.S.
monitoring the performance of the securitized assets.           government in the case of Fannie Mae and Freddie Mac
Advance Rate
The original principal balance of an auto loan divided by       All-in Cost
either the retail or the wholesale value of the vehicle         The total cost of a securitization to the issuer or sponsor
financed by the auto loan. The advance rate is the auto         (including the interest rate paid to investors' underwriting
loan equivalent of the LTV ratio for a residential              expenses and other expenses such as legal and
mortgage loan and is a measure of how much equity the           documentation fees) amortized over the expected average
                                                                life of the issue.

                                              Standard & Poor’s Structured Finance - Glossary of Securitization Terms         1
Allocated Percentage                                          American Depositary Receipt (ADR)
The proportion of a mortgage loan, usually a commercial       A certificate representing ownership of shares of equity in
mortgage loan secured by more than one property, that is      a non-U.S. corporation. ADRs are quoted and traded in
"allocated" to a particular property. The proportion is       U.S. dollars in the U.S. securities market; the associated
usually calculated by dividing the net operating income       dividends are paid to investors in U.S. dollars as well.
or net cash flow produced by the one property by the          ADRs were specifically designed to facilitate the
cumulative net operating income or net cash flow              purchase, holding, and sale of non-U.S. securities by U.S.
produced by all of the properties that secure the loan; the   investors, as well as to provide a corporate finance
sum of all of the "allocated percentages" should be           vehicle for non-U.S. issuers.
Alternative A Loan                                            The process whereby the principal amount of a liability is
A first-lien residential mortgage loan that generally         reduced gradually over time. ABS that return principal to
conforms to traditional "prime" credit guidelines,            investors, along with interest, are said to amortize.
although the LTV ratio, loan documentation, occupancy         Amortization is often contrasted with a bullet repayment
status, property type, or other factor causes the loan not    in which all principal is repaid at maturity. Scheduled
to qualify under standard underwriting programs. Less-        amortization is distinct from prepayment, which is
than-full documentation is typically the reason for           associated with a repayment of principal made before the
classifying a loan as "alternative A".                        date on which it was scheduled to be paid.

American Depositary Debenture (ADD)                           Amortization Period
A debt instrument that is an obligation of a non-U.S.         A period that may follow the revolving period of a
corporation but that is issued in the U.S. out of a deposit   transaction, during which the outstanding balance of the
facility for debentures similar to that used for shares of    related securities is partially repaid.
equity in non-U.S. corporations; ADDs represent
debentures on deposit in the issuer's home market.            Annual Payment Cap
                                                              The maximum percentage by which the periodic payment

2    Standard & Poor’s Structured Finance - Glossary of Securitization Terms
of interest and principal due with respect to an ARM          Asset-Independent Approach
loan can be increased in any one year.                        An approach to rating synthetic securities under which
                                                              the credit rating depends on the creditworthiness of the
Arbitrage CDO                                                 swap counterparty, or its guarantor, and does not reflect
A CDO transaction based on assets whose aggregate             a credit evaluation of the SPE's other assets.
yield is less than the aggregate yield for which the
securities issued in connection with the transaction can be   Asset Originator
sold or funded.                                               The party that has originated an asset or group of assets
                                                              by extending credit to one or more creditors.
Asset-Backed Commercial Paper (ABCP)
CP whose principal and interest payments are designed to      Average Life
be derived from cash flows from an underlying pool of         A measure of the duration of an investment, based on the
assets. In the event that CP cannot be reissued in order to   average length of time required to get back the principal
repay maturing CP, however, a backstop liquidity facility     amount invested. The average life is calculated by
is drawn upon to provide cash to repay investors.             multiplying each repayment of principal by the time
                                                              elapsed between making the investment and receiving the
Asset-Backed Securities (ABS)                                 principal repayment, summing the results, and dividing
Bonds or notes backed by pools of financial assets,           by the total amount invested. The actual average life of
typically with predictable income flows, originated by        an ABS is dependent on the rate at which the principal of
banks and other credit providers. Examples of such assets     the underlying assets is repaid because repayments on the
include credit card receivables, trade receivables, and       underlying assets are used to repay the principal balance
auto loans.                                                   of the security. The expected average life of a security can
                                                              be calculated assuming a constant prepayment rate with
                                                              respect to the underlying assets or a variable prepayment
The transfer of an interest, right, claim, or property from
                                                              rate. The expected average life is a useful tool for
one party to another.
                                                              comparing an amortizing ABS with other securities.

                                             Standard & Poor’s Structured Finance - Glossary of Securitization Terms      3
B                                                              Bankruptcy-Remote
                                                               The term applied to an entity that is not likely to have an
                                                               incentive to commence insolvency proceedings voluntarily
B Notes
A subordinated tranche in a senior/junior capital structure.   and that is not likely to have an involuntary insolvency
                                                               proceeding commenced against it by third-party creditors.
Backstop Facility
The agreement of a highly rated entity to make payment         Base Rate
in the event that the entity with the primary obligation to    With respect to a credit card receivables transaction, the
make the payment is unable to do so.                           base rate is the sum of the certificate rate and the
                                                               servicing fee rate.
Balance-Sheet CDO
A CDO transaction in which the sponsor securitizes             Basis Point (bp)
assets that it already owns.                                   One-hundredth of one percentage point (i.e., 1 bp equals
                                                               0.01%). One basis point is the smallest measure used to
Balloon Loan                                                   quote yields on bills, notes, and bonds.
A loan with respect to which a substantial portion of the
original principal balance is due upon the maturity of the     Basis Risk
loan.                                                          The risk arising from a mismatch between the index to
                                                               which assets are linked and the index to which the
Bank for International Settlements (BIS)                       related liabilities are linked. For example, an investor
An international bank headquartered in Basel,                  whose liabilities are indexed to three-month U.S. dollar
Switzerland, which serves as a forum for monetary              LIBOR incurs basis risk if he or she holds floating-rate
cooperation between several European central banks, the        notes with interest rates indexed to three-month U.S.
Bank of Japan, and the U.S. Federal Reserve System.            Treasury bills.
Founded in 1930 to handle the German payment of
World War I reparations, it now monitors and collects          Billet de Tresorie
data on international banking activity and promulgates         CP issued in the French market.
rules concerning international bank regulation.

4     Standard & Poor’s Structured Finance - Glossary of Securitization Terms
Bullet Loan                                                   rate. The investor forgoes the possibility of benefiting
Loan principal is repaid in full with only one single         from interest rate movements that would take the
payment at maturity.                                          coupon above the cap.

Bullet Maturity                                               Cash Collateral
The date on which the single repayment of the full            A form of credit enhancement involving the maintenance
principal balance of a debt obligation requiring no           of a reserve fund that can be tapped in the event of credit
interim repayments of principal is due.                       losses and subsequent claims by investors.

                                                              Cash Collateral Account (CCA)
C                                                             A reserve fund that provides credit support to a
                                                              transaction. Funds in a CCA are lent to the issuer by a
                                                              third party, typically an LOC bank, pursuant to a loan
A descriptive term applied to a loan or securities that can
be repaid ahead of schedule at the option of the
borrower.                                                     Cash Flow Waterfall
                                                              The rules by which the cash flow available to an issuer,
Capital Adequacy
                                                              after covering all expenses, is allocated to the debt service
The requirement for a regulated entity (such as a bank or
                                                              owed to holders of the various classes of securities issued
building society) to maintain a minimum level of capital
                                                              in connection with a transaction.
in proportion to the risk profile of its assets. By
securitizing its assets and removing them from its balance    Cash-Out Refinance Mortgage Loan
sheet without recourse, such an entity may be able to         A mortgage loan taken in order to refinance an existing
achieve regulatory capital relief because it is no longer     mortgage loan in a situation where the amount of the
required to maintain regulatory capital with respect to       new loan exceeds (by more than 1%) the amount
the securitized assets.                                       required to cover repayment of the existing loan, closing
                                                              costs, points, and repayment of any outstanding
Capped Floating-Rate Note
                                                              subordinate mortgage loans. The additional cash can be
A floating-rate note with an upper limit on the coupon
                                                              put to whatever use the borrower chooses.
                                             Standard & Poor’s Structured Finance - Glossary of Securitization Terms      5
Cherry-Picking                                                  connection with the funds borrowed. The lender can use
The practice of selecting assets from a portfolio based on      the pledged assets to recover some or all of the funds
specific criteria; the opposite of a sample selected at         loaned if the borrower fails to live up to the terms of the
random.                                                         loan agreement.

Clean-Up Call                                                   Collateral Interest Class
An optional redemption of securities at a point when the        The term applied to a subordinate class of securities
underlying collateral pool has been paid down to 15% or         issued in connection with a credit card receivables
less of its original principal balance and the cost of          transaction, which provides credit enhancement to more
servicing the remaining pool of assets has become               senior classes of securities issued in connection with the
uneconomic; the redemption is accomplished using the            same transaction. The collateral interest is often retained
proceeds received by the issuing SPE from selling the           by the transaction sponsor.
remaining assets, usually at a price of par, to the servicer
or the originator/sponsor of the assets. Such a redemption      Collateralized Bond Obligation (CBO)
also benefits investors in that it provides assurance that      A security backed by a pool of corporate bonds.
they will not be left with a tiny, illiquid fraction of their
                                                                Collateralized Debt Obligation (CDO)
original investment.
                                                                A security backed by a pool of various types of debt,
Clearstream International                                       which may include corporate bonds sold in the capital
A subsidiary of Deutsche Borse AG that provides                 markets, loans made to corporations by institutional
clearing, settlement, and custody services for stocks and       lenders, and tranches of securitizations.
bonds traded in European domestic and cross-border
                                                                Collateralized Loan Obligation (CLO)
                                                                A security backed by a pool of loans made to
Collateral                                                      corporations by institutional lenders, usually commercial
Assets that have value to both a borrower and a lender          banks.
and which the borrower pledges to the lender in

6     Standard & Poor’s Structured Finance - Glossary of Securitization Terms
Collateralized Mortgage Obligation (CMO)                     name of a third party in such a way that, in the
A security backed by a pool of mortgage loans or some        insolvency/bankruptcy of the third party, such cash
combination of residential mortgage loans and agency         cannot be separately identified or the cash is frozen in the
securities. A transaction in which CMOs are issued           accounts of the third party.
usually involves multiple classes of securities having
varying maturities and coupons.                              Conduit
                                                             A legal entity that purchases assets from several sellers
Combined LTV Ratio                                           and funds these purchases either through term
An LTV ratio calculated in situations where a property       securitizations or through the issuance of ABCP.
secures more than one mortgage loan.
                                                             Controlled Amortization
Commercial Mortgage-Backed Securities (CMBS)                 A period that may follow the revolving period of a
Securities that are backed by one or more pools of           transaction, during which the outstanding balance of the
mortgage loans. CMBS are backed by one or more loans         related securities is partially repaid. A controlled
secured by commercial properties, which may include          amortization period is usually 12 months in length.
multifamily housing complexes, shopping centers,
industrial parks, office buildings, and hotels.              Covenant
                                                             In terms of legal documents, a covenant is a promise to
Commercial Paper (CP)                                        do or not to do something stipulated in the related
Short-term promissory notes. The maturity of most CP is      agreement (for example, a covenant to supply periodic
less than 270 days, with the most common maturities          asset performance information to the trustee).
ranging from 30 to 50 days or less.
                                                             Credit Default Swap
Commingling Risk                                             A credit default swap is a contract whereby the
The risk that cash belonging to an issuing SPE is mixed      protection seller agrees to pay to the protection buyer
with cash belonging to a third party (for example, the       the settlement amount upon the occurrence of certain
originator or servicer) or goes into an account in the       credit events. In exchange for this protection, the

                                            Standard & Poor’s Structured Finance - Glossary of Securitization Terms      7
protection buyer will pay the protection seller a             Credit-Linked Note
premium.                                                      A note, payment of which depends on the occurrence or
                                                              existence of a credit event or credit measure with respect
Credit Derivatives                                            to a reference entity or pool of assets. For example,
Capital market instruments designed to transfer credit        payment on a credit-linked note might be dependent on
risk from one party to another; such instruments include      the level of losses within a reference pool of mortgage
credit default swaps, total return swaps, and credit-linked   loans remaining below a defined percentage of the
notes.                                                        original pool balance. Because the assets in the reference
                                                              pool remain on the balance sheet of the originator or
Credit Enhancement
                                                              owner of the assets, the originator or owner may see the
An instrument or mechanism that elevates the credit
                                                              issuance of credit-linked notes as a form of insurance
quality of the cash flow stream that one or more assets
                                                              against credit losses related to the reference pool assets.
are expected to produce above the stream's inherent
credit quality; elements within the structure of a            Credit Risk
securitization designed to protect investors from losses      Risk that a lending party will not be repaid at all or will
incurred on the underlying assets.                            be repaid less than the amount owed or will be repaid
                                                              over a longer time period than was originally agreed.
Credit Enhancer
A party that agrees to elevate the credit quality of          Cross-Collateralization
another party or a pool of assets by making payments,         A technique for enhancing the protection provided to a
usually up to a specified amount, in the event that the       lender by pledging each of the properties that secures an
other party defaults on its payment obligations or the        individual loan as collateral security for all of the loans
cash flow produced by the pool of assets is less than the     made to the same borrowing entity. Usually seen in
amounts contractually required because of defaults by the     connection with commercial mortgage loans.
underlying obligors.
                                                              Current Delinquency Status
                                                              The delinquency status of a loan as of the current date.

8    Standard & Poor’s Structured Finance - Glossary of Securitization Terms
CUSIP Number                                                 Default
A unique identification number assigned to a stock or        A failure by one party to a contractual agreement to live
bond issuance to facilitate clearing operations; the         up to its obligations under the agreement; a breach of a
numbering system is administered by the Committee on         contractual agreement.
Uniform Security Identification Procedures (CUSIP).
                                                             Defaulted Receivables
                                                             Receivables that, according to the related servicer's
D                                                            criteria, are uncollectable.
Debenture                                                    Defeasance
A certificate of indebtedness in which the terms and         The setting aside of cash or a portfolio of high-quality
conditions under which one party agrees to lend funds to     assets that will be used to cover the remaining interest
a second party are set forth and the second party agrees     and principal payments due with respect to a debt.
to repay the principal amount loaned to it, with or
without interest; typically, these are used for long-term    Delinquency
rather than short-term debt.                                 Failure to make a payment on a debt obligation by the
                                                             specified due date.
Debt Service Coverage Ratio (DSCR)
The annual net cash flow produced by an income-              Delinquent Receivables
generating property divided by the annual debt service       Receivables with respect to which the related obligors are
payments required under the terms of the mortgage loan       behind in making payments and which may, therefore,
or loans entered into for the purpose of financing the       subsequently be written off as uncollectable.
property. The DSCR is usually expressed as a multiple,
for example, 2.0 times (x).                                  Depository Trust Company (DTC)
                                                             A national depository for book-entry securities in the
                                                             U.S. that records, maintains, and transfers securities for

                                            Standard & Poor’s Structured Finance - Glossary of Securitization Terms      9
participants. DTC participants include securities                 Early Amortization Risk
brokers and dealers, banks, trust companies, and                  With respect to a securitization structured to protect
clearing corporations. Indirect access to the DTC                 investors from having the timing of the repayment of
system is also available to banks, brokers, dealers, and          their principal investment dictated by the timing of the
trust companies that clear through, or maintain                   repayment of the underlying assets, the risk exists that
custodial relationship with, a DTC participant.                   an early amortization event will occur thereby causing
                                                                  the protection intended to be built into the structure to
Due Diligence                                                     be nullified.
The investigation that a prospective buyer undertakes
before making a purchase or investment decision or, in            Enforceability Opinion
the U.S., that a broker/dealer is required to undertake           An opinion of counsel with respect to an agreement to
before selling a securities issuance to investors.                the effect that the obligations set forth in the agreement
                                                                  will be legal, valid, and binding on a party or all of the
                                                                  parties to the agreement and that the agreement will be
E                                                                 enforceable against that party or parties in accordance
                                                                  with its terms, subject to certain standard assumptions
Early Amortization Event
In certain ABS transactions - such as those backed by credit      and qualifications.
card receivables - that operate on a revolving basis, an
                                                                  Equitable Transfer
event, as defined in the transaction documents, could
                                                                  The process whereby the beneficial interest in, but not
trigger an immediate end to the revolving period and the
                                                                  legal ownership of, an asset is transferred. An equitable
early repayment of investor principal. Qualifying events
                                                                  transfer is common in European securitizations as it may
usually include (i) bankruptcy of the institution on which
                                                                  be significantly less expensive to arrange than a legal
the transaction depends for newly generated assets or
receivables during the revolving period or (ii) a fall in the
yield on the assets or receivables to specified trigger levels.

10    Standard & Poor’s Structured Finance - Glossary of Securitization Terms
Estate in Bankruptcy                                          These events cannot be predicted using standard methods
All of the assets of a debtor that has been adjudicated       of credit analysis.
bankrupt, less all of the debtor's outstanding obligations
to creditors, customers, and applicable taxing authorities.   Excess Servicing Fee
                                                              With respect to a securitization, a portion of the interest
Euro Interbank Offered Rate (EURIBOR)                         charged to underlying obligors that is not required to
The interest rate at which interbank term deposits            cover the interest portion of debt service payments or the
denominated in euros are offered by one prime bank in         regular servicing fee; the difference between the gross
the euro zone to another prime bank in the euro zone.         coupon and the sum of the net coupon paid to investors
EURIBOR is established by a panel of about 60                 and the servicing fee.
European banks. As with LIBOR, there are EURIBOR
rates for deposits of various maturities.                     Expected Maturity
                                                              The date as of which securities are expected to be repaid
Euroclear                                                     in full based on a specified assumption regarding the rate
One of two principal clearing systems in the Eurobond         at which the underlying assets will be repaid.
market that functions much like the Depository Trust
Company in the U.S. market. Euroclear began operations        Extension Risk
in 1968, is located in Brussels, and is managed by            The risk that the weighted-average life of a security will
Morgan Guaranty Bank.                                         be extended because the underlying collateral is prepaid
                                                              more slowly than expected.
Event Risk
The risk that an issuer's ability to make debt service        External Credit Enhancement
payments will change because of dramatic unanticipated        Credit support provided to a securitization by a highly
changes in the market environment, such as a natural          rated third-party.
disaster, an industrial accident, a major shift in
regulation, a takeover, or a corporate restructuring.

                                             Standard & Poor’s Structured Finance - Glossary of Securitization Terms       11
F                                                            Freddie Mac certificates are, like Fannie Mae certificates,
                                                             treated as 'AAA' investments.
Fannie Mae
                                                             Federal National Mortgage Assoc. (FNMA or "Fannie Mae")
Colloquial name for the U.S. Federal National Mortgage
                                                             Fannie Mae was established in its current form in 1968.
                                                             Fannie Mae is a quasi-governmental organization: it is
Fast Pay                                                     owned and managed as a private corporation, and its
A descriptive term applied to a security or a transaction    stock trades on the New York Stock Exchange, but it is
structure that is designed to ensure repayment of            subject to regulation by the U.S. Secretary of Housing
principal on an accelerated schedule.                        and Urban Development and the U.S. Secretary of the
                                                             Treasury. Fannie Mae buys "conventional" residential
Federal Home Loan Mortgage Corp. (FHLMC or "Freddie Mac")    mortgage loans that conform to specific guidelines.
Freddie Mac was created by Congressional charter in          Although Fannie Mae pass-through certificates are
1970. It was reconstituted in 1989 as a private              guaranteed as to timely payment of interest and principal,
corporation like Fannie Mae. Freddie Mac is a direct         that guarantee is also only implicitly supported by the
competitor of Fannie Mae; its guidelines for purchasing      U.S. government. Still, the level of commitment is
loans are very similar to those of Fannie Mae. Freddie       considered strong enough that the credit quality of
Mac has two different loan-purchase programs: (i)            Fannie Mae certificates is regarded as equivalent to
guarantees provided in connection with the "Gold"            'AAA'.
program cover timely payment of interest and principal
and (ii) guarantees backing standard Freddie Mac             Floating-Rate Notes
certificates cover timely payment of interest and            A class of securities having an interest rate that is not
"ultimate" payment of principal. The Freddie Mac             fixed, but typically has a margin above a market index.
guarantee does not have the direct support of the U.S.
                                                             Fonds Commun de Créance (FCC)
government. Freddie Mac is, however, viewed as having
                                                             A type of closed-end mutual debt fund, used as a funding
such a strong implicit call on the U.S. government that
                                                             vehicle in French securitizations.

12   Standard & Poor’s Structured Finance - Glossary of Securitization Terms
Foreclose                                                     Gearing
To take legal proceedings against a debtor that owns a        An accounting term used to define the debt-to-equity
piece of real property that has been mortgaged as security    ratio of a company. SPEs are typically more highly geared
for a loan. In a foreclosure, the lender seeks the right to   than operating companies.
sell the property and to use the proceeds of the sale to
satisfy all amounts owed by the debtor with respect to        Ginnie Mae
the loan.                                                     Colloquial name for the U.S. Government National
                                                              Mortgage Assoc.
A proceeding, in or out of court, on the part of a lender     Government National Mortgage Assoc. (GNMA or "Ginnie
holding a mortgage on real property. The purpose of the       Mae")
proceeding is to seek to enable the lender to sell the        Ginnie Mae was established in 1968 as a wholly owned
property and use the proceeds of the sale to satisfy all      corporate instrument of the U.S. government. Ginnie Mae
amounts owed by the owner with respect to the related         securities are backed by pools of loans that are insured by
loan.                                                         the Federal Housing Administration or guaranteed by the
                                                              Veterans Administration. Technically, Ginnie Mae securities
Freddie Mac                                                   are issued by the Ginnie Mae-approved mortgagees that
Colloquial name for the U.S. Federal Home Loan                originated the pooled mortgage loans, but these securities
Mortgage Corp.                                                carry an explicit Ginnie Mae guarantee, covering the timely
                                                              payment of interest and principal, which is backed by the
                                                              full faith and credit of the U.S. government. As a result,
G                                                             Ginnie Mae securities carry a 'AAA' rating.
                                                              Guaranteed Investment Contract (GIC)
Acronym for "generally accepted accounting principles",
                                                              A deposit account provided by a financial institution that
the accounting standards applicable in the U.S.
                                                              guarantees a minimum rate of return. Such contracts
                                                              mitigate interest rate risk.

                                             Standard & Poor’s Structured Finance - Glossary of Securitization Terms   13
H                                                            change in interest rates; for a deposit-taking institution,
                                                             the risk that the interest earned on assets acquired in a
                                                             lower interest rate environment will not be sufficient to
Hedge Fund
A fund that employs a variety of hedging techniques,         service the payments required in connection with
such as both buying and shorting stocks according to a       liabilities incurred in a higher interest rate environment.
valuation model, in order to enhance returns.
                                                             Interest Rate Swap
Hedging                                                      A binding agreement between two counterparties to
General term used to refer to strategies adopted to offset   exchange periodic interest payments on a predetermined
investment risks. Examples of hedging include the use of     principal amount, which is referred to as the notional
derivative instruments to protect against interest rate or   amount. Typically, one counterparty will pay interest at a
currency risks, and investment in assets whose value is      fixed rate and receive interest at a variable rate, and the
expected to rise faster than inflation to protect against    opposite will apply to the other counterparty.
                                                             Internal Credit Enhancement
Hybrid                                                       Structural mechanism or mechanisms built into a
A term used to refer to a whole-business securitization.     securitization to improve the credit quality of the senior
Such a transaction entails risks that are a hybrid of pure   classes of securities issued in connection with the
corporate risk and the risks associated with traditional     transaction, usually based on channeling asset cash flow
securitizations backed by financial assets or diversified    in ways that protect those securities from experiencing
pools of corporate credits.                                  shortfalls.

                                                             Investment Grade
I                                                            With respect to Standard & Poor's ratings, a long-term
                                                             credit rating of 'BBB-' or higher.
Interest Rate Risk
The risk that a security's value will change due to a

14   Standard & Poor’s Structured Finance - Glossary of Securitization Terms
Issue Credit Rating                                              obligations; essentially, an opinion of an obligor's
Standard & Poor's opinion of the creditworthiness of an          creditworthiness. An ICR focuses on the obligor's
obligor with respect to a specific financial obligation, a       general capacity and willingness to meet its financial
specific class of financial obligations, or a specific           commitments as they come due. It does not apply to
financial program (including MTN programs and CP                 any specific financial obligation, as it does not take
programs). An issue credit rating takes into consideration       into account the provisions of specific obligations, the
the creditworthiness of guarantors, insurers, or other           standing that specific obligations might have in a future
forms of credit enhancement and also the currency in             bankruptcy or liquidation of the obligor, statutory
which the obligation or obligations is denominated.              preferences applicable to specific obligations, or the
                                                                 legality and enforceability of specific obligations. In
Issuer                                                           addition, an ICR does not take into account the
The party that has authorized the creation and sale of           creditworthiness of the guarantors, insurers, or other
securities to investors. In the case of a securitization, the    forms of credit enhancement that might be available
issuer is usually set up as an SPE in a jurisdiction that        with respect to a specific obligation.
offers a favorable legal regime in terms of the ability to
achieve bankruptcy-remote status for the issuer and the
security arrangements provided for the investors and
which affords favorable the tax treatment. Common
                                                                 Jumbo Mortgage Loan
jurisdictions used for establishing SPEs are England (for
                                                                 A first-lien residential mortgage loan that typically
U.K. transactions), Italy (for Italian Law 130
                                                                 conforms to traditional "prime" credit guidelines but
transactions), Ireland, The Netherlands, Luxemburg,
                                                                 with a balance that exceeds the maximum allowed under
Jersey, Cayman Islands, and the State of Delaware, U.S.
                                                                 programs sponsored by Ginnie Mae, Fannie Mae, and
(for CP issuing vehicles).
                                                                 Freddie Mac.
Issuer Credit Rating (ICR)
An ICR is Standard & Poor's opinion of an obligor's
overall financial capacity to pay its financial

                                                Standard & Poor’s Structured Finance - Glossary of Securitization Terms   15
L                                                              securitizations, Standard & Poor's assumes that
                                                               repayment by the legal final maturity must be met using
                                                               only scheduled principal collections on the underlying
Lead Manager
An investment bank or securities dealer that manages a         assets.
syndicate of dealer banks and agrees to place a securities
                                                               Letter of Credit (LOC)
issuance. Because the lead manager is usually allocated a
                                                               An agreement between a bank and another party under
larger share of the issuance, it has more at stake in terms
                                                               which the bank agrees to make funds available to or
of the success of the effort to market and place the
                                                               upon the order of the other party upon receiving
securities. As a result, the lead manager often takes on
the role of chief advisor to the issuer or, in the case of a
securitization, to the seller of the assets that are being     Lien
securitized.                                                   An encumbrance against a property, which may be
In the case of a securitization, such advisory work usually    voluntary (as in the case of a mortgage) or involuntary
involves responsibility for structuring the securities to be   (as in the case of a lien for unpaid property taxes), which
issued and liaison with other parties such as rating           acts as security for amounts owed to the holder of the
agencies, lawyers, and credit enhancers.                       lien.
The lead manager is also closely involved in the
preparation of the transaction's offering circular and         Line-of-Credit Mortgage Loan
advises its client on the pricing of the related securities.   A mortgage loan that is linked to a revolving line of
The lead manager may have legal liability as to the            credit upon which the borrower can draw at any time
compliance of the issuance with relevant securities laws       during the life of the loan. The interest rate charged on
and regulations.                                               the loan is usually variable, and interest accrues on the
                                                               basis of the outstanding balance only, while the undrawn
Legal Final Maturity                                           principal limit grows at an annual rate.
The date by which the principal balance of securities
must be repaid. In performing its rating analysis for

16    Standard & Poor’s Structured Finance - Glossary of Securitization Terms
Liquidity Facility                                             Loan-to-Value (LTV) Ratio
A facility, such as an LOC, used to enhance the liquidity      The balance of a mortgage loan divided by either the
(but not the creditworthiness) of securitized assets.          value of the property financed by the loan or the price
                                                               paid by the borrower to acquire the property. The LTV
Liquidity Provider                                             ratio is a measure of how much equity the borrower has
The provider of a facility that ensures a source of cash       in the asset that secures the loan. The higher the LTV
with which to make timely payments of interest and             ratio, the less equity the borrower has at stake and the
principal on securities if there is a temporary shortfall in   less protection is available to the lender by virtue of the
the cash flow being generated by the underlying assets.        security arrangement.
Unlike amounts drawn under a credit enhancement
facility, amounts drawn under a liquidity facility become      London Interbank Offered Rate (LIBOR)
a senior obligation of the issuer ranking at least pari        The rate of interest that major international banks in
passu with the related securities.                             London charge each other for borrowings. There are
In the case of an ABCP program, a liquidity facility must      LIBOR rates for deposits of various maturities.
also cover the risk of a disruption in the CP market or
currency swap market (if there is a mismatch in currency       Loss Curve
between the assets and the ABCP itself).                       With respect to a sample of loans or receivables, the loss
                                                               curve is a graphical representation of the pattern of losses
Liquidity Risk                                                 experienced over time, based on plotting the defaults or
The risk that there will be a limited number of buyers         losses that occur over the life of all loans or receivables in
interested in buying an asset, usually a financial asset, if   the sample.
and when the current owner of the asset wishes to sell it.
                                                               Low-Rise Condominium
Listing Agent                                                  A multifamily property of no more than four stories,
The agent responsible for carrying out the procedures          which is held under an ownership system in which
required to have securities listed on the appropriate          individuals own the residential units and the common
stock exchange.                                                areas are owned jointly.

                                              Standard & Poor’s Structured Finance - Glossary of Securitization Terms           17
M                                                             the assets being allocated between the series according to
                                                              a predetermined formula.
Mark to Market
                                                              Medium-Term Note (MTN)
To re-state the value of an asset based on its current
                                                              A corporate debt instrument that is continuously offered
market price.
                                                              over a period of time by an agent of the issuer. Investors
Master Servicer                                               can select from maturity bands of nine months to one
In a residential mortgage loan context, the master            year, more than one year to 18 months, more than 18
servicer is the servicing organization responsible for        months to two years, etc., up to 30 years.
overseeing the activities of primary servicers. Oversight
                                                              Monoline Insurer
functions typically include: (i) tracking the movement of
                                                              An insurance company that is restricted, by the terms of
funds between the primary and master servicer accounts,
                                                              its charter, to writing insurance policies related to a single
(ii) monitoring the preparation and delivery of monthly
                                                              type of risk. In a financial context, the monoline insurer
remittance and servicing reports by the primary servicers,
                                                              unconditionally guarantees the repayment of certain
(iii) monitoring the collections process, foreclosure
                                                              securities issued in connection with specified types of
actions, and real estate owned (REO) activities of the
                                                              transactions, usually a securitization and, in the U.S.,
primary servicers, (iv) preparing aggregate reports on
                                                              municipal bonds, in return for the payment of a fee or
servicing activities, (v) distributing funds to trustees or
directly to investors, and (vi) having the authority to
                                                              The financial guarantee provided by a monoline insurer
remove and replace a primary servicer. In a commercial
                                                              typically allows the insured class or classes of a
mortgage loan context, the master servicer is responsible
                                                              securitization to be rated based on the financial guarantee
for servicing mortgage loans.
                                                              rating on the insurer, with the result that the classes are
Master Trust                                                  rated in a much higher category than they would be if the
An SPE that issues multiple series of securities backed by    financial guarantee were not in place.
a single pool of assets, with the cash flow generated by      Monoline coverage may also be used to enhance the

18    Standard & Poor’s Structured Finance - Glossary of Securitization Terms
creditworthiness of certain assets financed via a CP           as collateral. In addition, sellers maybe able to benefit
conduit in cases where the unenhanced credit quality of        from the lower cost of funds made possible by
the assets being securitized does not meet the minimum         securitization even though the volume of assets that they
requirements of the CP conduit.                                originate are insufficient to absorb the transaction costs
                                                               involved in a stand-alone securitization.
A security interest in real property given as security for
the repayment of a loan.                                       N
Mortgage-Backed Securities (MBS)                               Negative Amortization
MBS include all securities whose security for repayment        An addition to the principal balance of a loan based on
consists of a mortgage loan or a pool of mortgage loans        the amount paid periodically by the borrower being less
secured on real property. Investors receive payments of        than the amount required to cover the amount of interest
interest and principal that are derived from payments          due.
received on the underlying mortgage loans.
                                                               Negative Amortization Limit
Mortgagee                                                      The maximum amount by which the balance of a
The lender with respect to a mortgage loan.                    negatively amortizing loan can increase before the LTV
                                                               ratio exceeds a pre-defined limit; when this point is
Mortgagor                                                      reached, the repayment schedule for the loan is recast to
The borrower with respect to a mortgage loan.                  ensure that the full balance will be repaid by maturity.

Multi-Seller Conduit                                           Net Receivables
A CP conduit that finances the assets of multiple sellers.     The principal balance of receivables without the inclusion
One advantage of such arrangements is that they enable         of any portion of the interest due with respect to those
sellers to access the CP market indirectly if they want to     receivables.
maintain anonymity regarding the use of their receivables

                                              Standard & Poor’s Structured Finance - Glossary of Securitization Terms   19
Nonperforming                                                            Offering Circular
Term used to describe a loan or other receivable with                    A disclosure document used in marketing a new
respect to which the obligor has failed to make at least                 securities issuance to prospective investors. The
three scheduled payments.                                                offering circular describes the related transaction,
                                                                         including the characteristics of each class of securities
Notional Amount                                                          to be issued (such as the basis for interest payments,
The balance that is used as the basis for calculating the                credit rating, expected average life, and priority with
interest due with respect to an obligation that either has               respect to other classes). In the case of a securitization,
no principal balance or has a principal balance that is not              the offering circular also provides information about
the balance used for calculating interest.                               the underlying assets, including the type of assets and
                                                                         their credit quality. The offering circular is usually
                                                                         prepared by the lead manager of the securities issuance
The substitution of a new legal obligation for an existing obligation.
                                                                         and its legal advisors.

O                                                                        One-Tier Transaction
                                                                         A securitization in which the transferor sells or pledges
Obligor                                                                  assets directly to the issuing SPE and/or the bond trustee
The party that has agreed to be responsible for taking                   or custodian, as applicable, and thus does not involve
certain actions under the terms of a contractual agreement               several transfers of the assets and one or more
between that party and other parties; often, the actions                 intermediate SPEs.
agreed to by the obligor include making payments to other
parties. In the context of a securitization, the term                    Original LTV Ratio
"obligors" is generally the term used in referring to the                The original amount owed with respect to a mortgage
parties making payments on the assets being securitized;                 loan divided by the value of the property securing the
these payments are the source of cash flows from which                   loan. In the case of residential mortgage loans, "value" is
investors are repaid.                                                    generally taken to mean the lesser of the current
                                                                         appraised value of the property or the price at which the

20     Standard & Poor’s Structured Finance - Glossary of Securitization Terms
borrower purchased the property. In the case of                agreed to be responsible for making payments on
commercial mortgage loans, "value" is generally taken to       securities to investors. Payment is usually made via a
mean the current appraised value of the property.              clearing system. In Europe, this role is often assumed by
                                                               an entity affiliated with the trustee or the administrator;
Origination                                                    by contrast, in the U.S., the trustee itself is generally
The process of making loans.                                   responsible for making payments to investors. The main
                                                               clearing systems in Europe are Euroclear and Clearstream
An entity that underwrites and makes loans; the
obligations arising with respect to such loans are             Payment History
originally owed to this entity before the transfer to the      A record of a borrower's payments, often with respect to
SPE.                                                           a residential mortgage loan.
Overcollateralization                                          Payout Event
A capital structure in which assets exceed liabilities.        An early amortization event.
Overcollateralization is used as a form of credit
enhancement in certain asset-backed transactions. For          Performing
example, an issuance of £75 million of senior securities       Term used to describe a loan or other receivable with
might be secured by a pool of assets valued at £100            respect to which the borrower has made all interest and
million, in which case the overcollateralization for the       principal payments required under the terms of the loan
senior securities would be 25%.                                or receivable.

P                                                              A debt instrument issued by German mortgage banks and
                                                               certain German financial institutions. There are two types
Paying Agent
                                                               of Pfandbriefe: "Hypothekenpfandbriefe" that banks use
A bank of international standing and reputation that has
                                                               to finance their lending activities and "Öffentliche

                                              Standard & Poor’s Structured Finance - Glossary of Securitization Terms   21
Pfandbriefe" that they use to finance their lending to       expressed as a percentage of the remaining principal
public sector entities.                                      balance of the pool. Prepayment rates are often sensitive
                                                             to market rates of interest.
Pool Factor
The percentage of the original aggregate principal balance   Prepayment Risk
of a pool of assets that remains outstanding as of a         The risk that the yield on an investment will be adversely
particular date.                                             affected if some or all of the principal amount invested is
                                                             repaid ahead of schedule or more rapidly than expected;
Pooling and Servicing Agreement                              more generally, prepayment risk can also be taken to
A contract that documents a transaction in which a           include extension risk, which is related to the repayment
defined group of financial assets are aggregated and that    of principal more slowly than expected.
sets forth the agreement between the parties to the
contract as to how the future cash flows to be generated     Pricing
by those assets will be divided.                             The process of determining the coupon and the price
                                                             for securities prior to their issuance. In general, the
Portfolio Manager                                            price of any financial instrument should be equal to the
An individual or institution that manages a portfolio of     present value of the cash flows that it is expected to
investments; also called a money manager.                    produce. In the context of a securitization, because the
                                                             timing of the cash flows will be affected by the rate at
                                                             which the underlying assets are prepaid, the pricing
An amount over and above the regular price paid for an
                                                             process involves generating expected-case cash flows
asset, usually as an inducement or incentive; an amount
                                                             using a prepayment scenario.
in excess of the nominal or par value of a security.
                                                             Primary Market
Prepayment Rate
                                                             A market in which assets are sold by the entity that has
The rate at which the mortgage loans or other receivables
                                                             made those assets.
in discrete pools are reported to have been repaid,

22   Standard & Poor’s Structured Finance - Glossary of Securitization Terms
Primary Servicer                                               Protection Seller
With respect to a residential mortgage loan, the entity        In a transaction such as a credit default swap, the party
with primary responsibility for collection of monthly          that accepts the credit risk associated with certain assets.
payments from the borrower, remittance of funds to the         To the extent that losses are incurred on the assets in
owner of the loan or a party acting on behalf of the           excess of a specified amount, the protection seller makes
owner of the loan, maintenance of tax and insurance            credit protection payments to the protection buyer.
escrow accounts, following up on delinquent payments,
engaging in loss-mitigation efforts, initiating                100% PSA
foreclosure proceedings when necessary, disposing of           The benchmark mortgage prepayment scenario. Under
the mortgaged property following a foreclosure, and            this scenario, the monthly prepayment rate is assumed to
providing periodic reports on the status of the loan to        be 0.2% per year in the first month after issuance and to
the owner of the loan or a party acting on behalf of the       increase by 20 bps per year each month for the next 28
owner of the loan.                                             months. Beginning in the 30th month after issuance, the
                                                               monthly prepayment rate is assumed to level off at 6%
Profit Stripping                                               per year and to remain at that level for the life of the
The process whereby a company that has sold its assets         mortgage pool to which the scenario is being applied.
in a securitization continues to extract value from those
assets by siphoning off the profits earned by the              200% PSA
securitization vehicle, in effect retaining the economic       A prepayment scenario in which prepayments are
benefits of ownership of the securitized assets.               assumed to be made at speeds that are two times as fast
                                                               as under the benchmark mortgage prepayment scenario.
Protection Buyer                                               Under the 200% PSA scenario, the monthly prepayment
In a transaction such as a credit default swap, the party      rate is assumed to be 0.4% per year in the first month
transferring the credit risk associated with certain assets    after issuance and to increase by 40 bps per year each
to another party in return for the payment of what is          month for the next 28 months. Beginning in the 30th
typically an up-front premium.                                 month after issuance, the monthly prepayment rate is
                                                               assumed to level off at 12% per year and to remain at

                                              Standard & Poor’s Structured Finance - Glossary of Securitization Terms     23
that level for the life of the mortgage pool to which the    correct. In the context of a securitization, representation
scenario is being applied.                                   and warranty clauses usually cover the condition and
                                                             quality of the assets at the time of their transfer from the
                                                             originator to the SPE or an intermediate transferor; the
R                                                            clauses also specify the remedies available to the SPE or
                                                             the intermediate transferor in the event that any of the
Rated Securities
Securities to which an issue credit rating has been          representations are subsequently found to have been
assigned by a rating agency.                                 untrue.

Receivables                                                  Reserve Account
General term referring to principal- and interest-related    A funded account available for use by an SPE for one or
cash flows that are generated by an asset and are payable    more specified purposes. A reserve account is often used
to (and hence receivable by) the owner of the asset.         as a form of credit enhancement. Some reserve accounts
                                                             are also known as "spread accounts". Virtually all
Reinvestment Risk                                            reserve accounts are at least partially funded at the start
The risk that the yield on an investment will be adversely   of the related transactions, but many are designed to be
affected if the interest rate at which interim cash flows    built up over time using the excess cash flow that is
can be reinvested is lower than expected.                    available after making payments to investors.

Representations and Warranties                               Residential Mortgage-Backed Securities (RMBS)
Clauses in an agreement in which one or more parties to      RMBS are the most fundamental form of securitization.
the agreement confirm certain factual matters and agree      These securities involve the issuance of debt, secured by a
that, in the event that those statements of fact are         homogenous pool of mortgage loans that have been
incorrect, they will take steps to ensure that the           secured on residential properties.
statements are correct or otherwise compensate the other
parties to the agreement because the statements are not      Resolution Trust Corp. (RTC)
                                                             An arm of the U.S. government established to liquidate

24   Standard & Poor’s Structured Finance - Glossary of Securitization Terms
the assets of thrift savings and loan institutions that failed   degree of risk that they entail.
in the late 1980s.
                                                                 Risk-Weighting Bucket
Reverse Mortgage Loan                                            A risk-weighting category that is defined as including
A nonrecourse residential mortgage loan that requires no         assets that involve a similar degree of risk.
repayment for as long as the borrower uses the property
securing the loan as his or her principal residence.             Rule 144A
                                                                 An SEC rule providing an exemption to the SEC
Revolving Period                                                 registration requirements of the U.S. Securities Act of 1933.
The period during which newly originated loans or other          Effectively, Rule 144A permits qualified institutional buyers
receivables may be added to the asset pool of a revolving        to trade privately placed securities without satisfying certain
transaction.                                                     holding period requirements, thereby substantially
                                                                 increasing the liquidity of such securities.
Risk-Asset Ratio
The ratio, as stipulated by the Bank for International
Settlements' (BIS) capital adequacy rules, that defines the
minimum amount of capital that a regulated entity must
                                                                 Scheduled Interest
hold against a unit of assets. The ratio varies according
                                                                 The amount of interest owed at the end of the current
to the perceived risk of the asset - commercial mortgage
loans have a ratio of 1.0 (i.e., the full amount of the BIS
minimum is required) whereas residential mortgages are           Scheduled Principal
of a lesser risk and therefore require 50% of the                The amount of principal scheduled to be repaid at the
minimum stipulated capital (i.e., they have a risk-asset         end of the current period.
ratio of 0.5).
                                                                 "Schuldschein" or "Schuldscheindarlehen"
Risk-Weighting                                                   Loans made in the domestic German market that are
The practice of classifying assets on the basis of the           evidenced by a promissory note.

                                               Standard & Poor’s Structured Finance - Glossary of Securitization Terms       25
Seasoning                                                     Secured Loan
Descriptive term used to refer to the age of an asset being   A type of secured debt in the form of a loan.
securitized; useful as an indication of how long the
obligor has been making payments and satisfying its           Securities and Exchange Commission (SEC)
other obligations with respect to the asset prior to its      An agency of the U.S. government which is empowered
securitization.                                               to issue regulations and to enforce provisions of federal
                                                              securities laws and its own regulations, including
Secondary Market                                              regulations governing the disclosure of information
A market in which existing securities are re-traded (as       provided in connection with offering securities for sale to
opposed to a primary market in which assets are               the public; also responsible for regulating the trading of
originally sold by the entity that made those assets);        these securities.
usually, these securities are traded among investors
through an intermediary, such as an organized exchange        Securitization
like the NYSE, Amex, and Nasdaq.                              An issuance of securities backed by specific assets.

Secondary Mortgage Market                                     Security
Market for the buying, selling, and trading of individual     Assets that have value to both a borrower and a lender
mortgage loans and MBS.                                       and that the borrower pledges to the lender to ensure
                                                              that the borrower will live up to its obligations under a
Second-Lien Mortgage Loan                                     loan agreement between the two; the lender can use the
A loan secured by a mortgage or trust deed, the lien of       assets to recover some or all of the funds owed by the
which is junior to the lien of another mortgage or trust      borrower if the borrower defaults.
Secured Debt                                                  Common structure of securitizations that provides credit
Borrowing that is made, in part, on the basis of security     enhancement to one or more classes of securities by
pledged by the borrower to the lender.                        ranking them ahead of (senior to) other (junior) classes of

26   Standard & Poor’s Structured Finance - Glossary of Securitization Terms
securities. In such a relationship, the senior classes are      term to maturity of the underlying assets is as long as
often called the class A notes and the junior (or               possible. The stated maturity of securities issued in
subordinated) classes are called the class B notes.             connection with securitizations is stipulated for legal and
                                                                regulatory reasons and has little relevance for investment
Servicer                                                        analysis (see also Expected Maturity and Average Life).
The organization that is responsible for collecting loan
payments from individual borrowers and for remitting            Static Pool
the aggregate amounts received to the owner or owners           A pool of assets made up of assets originated only during
of the loans.                                                   a finite period of time, usually a month or a quarter.

Special-Purpose Entity (SPE)                                    Stress Testing
A bankruptcy-remote SPE (whether in the form of a               The process used by Standard & Poor's to evaluate
corporation, partnership, trust, limited liability company,     whether the assets that will form the collateral for a
or other form) that satisfies Standard & Poor's special-        securitization are likely to produce sufficient cash flows
purpose criteria.                                               under varying stressful economic scenarios to make
                                                                principal and interest payments due on the related
Sponsor                                                         securities. The scenarios generally include a "worst case"
The entity that sponsors a securitization, either because it    and provide an indication of whether the proposed
was the originator of the assets that are being securitized     structure and level of credit enhancement is sufficient to
or because it owned those assets immediately prior to           achieve a particular credit rating for some or all of the
their securitization.                                           various tranches issued in connection with the
                                                                transaction. (See also WAFF and WALS.)
Stated Maturity
The final date on which a security must be repaid to            Structured Finance
avoid an event of default. In the context of a                  A type of financing in which the credit quality of the debt
securitization, the stated maturity is calculated assuming      is assumed to be based on a direct guarantee from a
that there are no prepayments and that the remaining            creditworthy entity or on the credit quality of the

                                               Standard & Poor’s Structured Finance - Glossary of Securitization Terms   27
debtor's assets, with or without credit enhancement,          oversees the preparation of an information memorandum
rather than on the financial strength of the debtor itself.   or offering circular to be used for the offering and listing
                                                              of the related securities. The structuring bank ensures
Structured Investment Vehicle (SIV)                           that the transaction complies with local regulatory
A type of SPE that funds the purchase of its assets, which    requirements, if any (such as approvals by any relevant
consist primarily of highly rated securities, through the     bank commission or listing authority).
issuance of both CP and MTNs. In the event of a default
by a SIV, its pool of assets may need to be liquidated;       Subordinated Class
therefore, Standard & Poor's rating on a SIV reflects the     A class of securities with rights that are subordinate to
risks associated with potential credit deterioration in the   the rights of other classes of securities issued in
portfolio and market value risks associated with selling      connection with the same transaction; subordination
the assets.                                                   usually relates to the rights of holders of the securities
                                                              to receive promised debt service payments, particularly
Structuring Bank                                              in situations in which there is not sufficient cash flow
The investment bank responsible for co-ordinating the         to pay promised amounts to the holders of all classes of
execution of a securitization with respect to the             securities, but may it also be related to the noteholder's
originator/client, various law firms, rating agencies, and    right to vote on issues related to the operation of the
other third parties. Typically, the structuring bank          transaction.
performs a due diligence exercise with respect to the
assets to be securitized and the capacity of the servicer.    Subordinated Debt
This exercise includes the identification of historical       Debt that is ranked junior to other debt. Subordinated
information and often an asset audit. The structuring         debt is usually paid after amounts currently due (or past
bank is also responsible for developing the legal structure   due) to holders of senior debt before paying amounts
of the transaction, which must be documented, and for         currently due (or past due) to holders of the subordinated
identifying and resolving accounting and tax issues.          debt.
In the case of a public issue, the structuring bank

28    Standard & Poor’s Structured Finance - Glossary of Securitization Terms
Subprime Mortgage Loan                                          noncommercial risks (for example, the imposition of
A first- or second-lien residential mortgage loan made to       withholding tax). Standard & Poor's will not allow losses
a borrower who has a history of delinquency or other            suffered due to these events to be made good ahead of
credit problems.                                                payments to investors. Complex rules are required to be
                                                                observed to produce rating-compliant swaps both as to
Subrogation                                                     documentation issues and also the swap provider's rating.
The succession by one party, often an insurer, to another       It is not unusual for the swap provider to enter into a
party's legal right to collect a debt from or enforce a         back-to-back arrangement with the originator so that the
claim against a third party.                                    swap provider "hedges out" its exposure. This involves
                                                                the swap provider entering into an agreement with the
                                                                originator who previously hedged the assets on its own
An agreement pursuant to which two counterparties
                                                                balance sheet (subject to prior acceptance of auditors). If
agree to exchange one cash flow stream for another.
                                                                no back-to-back arrangement is obtained, then an
These can include interest-rate swaps, currency swaps, or
                                                                additional risk premium may be charged by the swap
swaps to change the maturities or yields of a bond
                                                                provider to take into account the cost of hedging its
                                                                position under the swap.
Swap Provider
                                                                Synthetic Securities
The party that writes a swap contract. Swaps are often
                                                                Securities that are designed to modify the cash flows
used in securitizations to hedge mismatches between the
                                                                generated by underlying asset securities and that are rated
assets and the securities. Such mismatches may relate to
                                                                based primarily on the creditworthiness of the asset
interest type (fixed vs. floating), interest index, currency,
                                                                securities and currency or interest rate swaps, or other
tenor, or a combination thereof.
                                                                similar agreements.
Since the swap counterparty is entering into a transaction
with an SPE, it has no recourse of any value beyond the         Synthetic CDO
assets securing the transaction to cover potential              A CDO transaction in which the transfer of risk is
breakage costs or unexpected expenses resulting from

                                               Standard & Poor’s Structured Finance - Glossary of Securitization Terms   29
effected through the use of a credit derivative as opposed    True Sale Opinion
to a true sale of the assets.                                 With respect to a securitization, an opinion of counsel to
                                                              the effect that the assets that are being securitized have
                                                              been transferred from the originator to the issuing SPE in
T                                                             a manner that is opposable against the originator, any
                                                              creditors of the originator, and any bankruptcy officer of
A U.S. financial institution, of which the most common        the originator, and that the assets that have been
are savings and loan associations and savings banks.          transferred will not form part of the bankruptcy estate of
Traditionally, these regulated bodies provide residential     the originator or be subject to any applicable automatic
mortgage loans and consumer loans, operating in a             stay or moratorium provisions.
similar way to building societies in the U.K.
Trigger Event                                                 A third party, often a specialist trust corporation or part
With respect to a securitization, the occurrence of an        of a bank, appointed to act on behalf of investors. In the
event which indicates that the financial condition of the     case of a securitization, the trustee is entrusted with
issuer or some other party associated with the transaction    responsibility for reaching certain key decisions that may
is deteriorating; typically, such events are defined in the   arise during the life of the transaction.
transaction documents, as are the changes to the              The role of the trustee may also include holding security
transaction structure and/or priority of payments that are    over the securitized assets and control over cash flows.
mandated following the occurrence of such an event.           It is often a requirement of listing ABS that an
                                                              independent trustee be appointed.
Trophy Asset                                                  Trustees receive regular reports on the performance of the
A large commercial property that enjoys a high profile as     underlying assets in order to check whether, for instance,
a result of some combination of prestigious location,         cash flow procedures are being followed.
highly visible owners, prominent tenants, and often           Subject to appropriate indemnity and other protections,
striking design.                                              the trustee is also typically responsible for finding a

30   Standard & Poor’s Structured Finance - Glossary of Securitization Terms
replacement servicer when necessary, taking up legal             and equity investments. Also referred to as the
proceedings on behalf of the investors, and, as the case         "weighted-average cost of capital".
may be, for selling the assets in order to repay investors.
To enable the trustee to perform its duties and to provide       Weighted-Average Coupon (WAC)
adequate remuneration, it receives a fee paid senior to all      The "average" interest rate for a group of loans or
other expenses and a senior ranking indemnity to cover           securities, calculated by multiplying the coupon
all unexpected costs and expenses.                               applicable to each loan or security in the group by a
                                                                 fraction, the numerator of which is the outstanding
                                                                 principal balance of the related loan or security and the
U                                                                denominator of which is the outstanding principal
                                                                 balance of the entire group of loans or securities.
Any party that takes on risk. In the context of the capital      Weighted-Average Foreclosure Frequency (WAFF)
markets, a securities dealer that commits to purchasing          The estimated percentage of assets in a securitization
all or part of a securities issuance at a specified price. The   pool that will go into default under an economic scenario
existence of such a commitment gives the issuer certainty        designed to test whether the cash flow that is expected to
that the securities will be placed and at what price. Thus,      be generated by the pool plus available credit
the underwriter assumes the market risk of placing the           enhancement will be sufficient to repay all securities rated
newly issued securities with investors, in return for which      at a certain rating category and higher. The WAFF is used
it charges an underwriting fee.                                  in conjunction with the WALS to determine the expected
                                                                 level of losses at different rating categories.

W                                                                Weighted-Average Loss Severity (WALS)
                                                                 The average loss that is expected to be incurred in the
Weighted-Average Cost of Funds
The weighted-average rate of return that an issuer must          event that any one asset in a securitization pool goes into
offer to investors for a combination of borrowed funds           default, expressed as a percentage of outstanding
                                                                 principal balance of the asset as of the date of the default.

                                               Standard & Poor’s Structured Finance - Glossary of Securitization Terms       31
The expected loss is predicated on assumptions about the     securitization can achieve a higher rating on and longer
potential decline in the market value of collateral that     term of the securitized debt than a company's secured or
may secure the asset. The WALS is used in conjunction        unsecured corporate debt.
with the WAFF to determine the expected level of losses
at different rating categories.

Weighted-Average Maturity (WAM)
A measure of the remaining term to maturity of a group
of loans, calculated by multiplying the remaining months
to maturity of each loan in the group by a fraction, the
numerator of which is the outstanding principal balance
of the related loan and the denominator of which is the
outstanding principal balance of the entire group of

Whole Business Securitization
A whole-business securitization or corporate
securitization refers to the issuance of bonds backed by a
company's cash flow generating assets and/or its
inventory. In the event of bankruptcy proceedings or the
company's insolvency, the security may have been legally
isolated in favor of the holders of the notes and might be
managed by a backup operator, thereby prolonging the
security's cash flow generating capacity in favor of the
noteholders. When adequate enhancements to the
securitized debt structure have been put in place,

32   Standard & Poor’s Structured Finance - Glossary of Securitization Terms
Analytical Contacts:
Apea Koranteng                                                                          Alain Carron
Managing Director                                                                       Managing Director
Tel: (44) 20-7826-3531                                                                  Tel: (44) 20-7826-3692                                           
Stroma Finston                                                                          Simon Collingridge
Managing Director                                                                       Director
Tel: (44) 20-7826-3638                                                                  Tel: (44) 20-7826-3841                                           
Perry Inglis
Managing Director
Tel: (44) 20-7826-3857                                             

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