Credit Enhancement
Definition
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.
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).
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.
Excess Spread
The difference between interest received on the asset pool and interest paid on issued notes plus fees. The first line of defence absorbing losses; captured in the spread account before OC tests apply.