Credit Enhancement
Definition
Liquidity Facility
A committed credit line (typically from a bank) that the SPV can draw on to cover timing gaps between asset cash flows and note payment dates. Does not cover credit losses — only liquidity shortfalls.
Deep Dives
Related Terms
Credit Enhancement
Structural mechanisms that improve the credit quality of notes issued by an SPV, protecting noteholders from losses. Can be internal (OC, excess spread, subordination, reserve accounts) or external (letters of credit, guarantees, insurance wraps).
Reserve Account
A cash account funded at closing that provides a liquidity and credit buffer. Typically sized at 0.5–2% of initial pool balance; replenished from excess spread after other waterfall payments.
Servicer Advances
Payments made by the servicer of delinquent scheduled amounts (typically up to 30–60 days) to maintain cash flow continuity to noteholders. Recoverable from future collections; act as temporary credit enhancement preventing interest shortfalls.