Early Amortization
Definition
A protective mechanism in ABS (particularly credit card and auto loan securitizations) where principal collections are used to pay down debt tranches rather than purchasing new receivables, triggered by deterioration in portfolio performance metrics such as delinquency rates, charge-offs, or excess spread declining below thresholds. Early amortization accelerates investor payback but signals credit stress.
Why it matters
Early amortization was a critical feature during the 2008 financial crisis when credit card ABS trusts experienced rapid deterioration. When charge-offs exceeded thresholds (often 6-8%), trusts stopped revolving and began rapidly paying down bonds. This protected bondholders from further credit deterioration but left equity holders with no residual cash flows. Understanding early amortization triggers is essential for ABS investors—once triggered, the structure fundamentally changes from revolving to amortizing.
Technical details
Common trigger events
Typical early amortization triggers in credit card ABS include: (1) Charge-off rate exceeds threshold (e.g., 3-month average over 8%). (2) Delinquency rate exceeds threshold (e.g., 60+ days past due over 12%). (3) Excess spread falls below minimum (e.g., monthly excess spread below 0% for 3 consecutive months). (4) Payment rate falls below minimum (percentage of outstanding balance paid each month). (5) Servicer default or bankruptcy. (6) Portfolio balance falls below minimum dollar threshold. Each deal has specific thresholds and measurement periods; verify in transaction documents.
Mechanics after trigger
Once early amortization triggers: (1) Trust stops purchasing new receivables. (2) All principal collections pay down bonds sequentially by seniority. (3) Portfolio balance shrinks rapidly (typically 12-18 month full paydown). (4) Excess spread (if any) continues to cover losses, but all principal to bonds. (5) Equity receives no further distributions until bonds fully paid. (6) Servicer may lose certain discretionary rights. This creates a race between portfolio runoff and continuing charge-offs—if losses exceed remaining subordination during amortization, senior tranches can experience losses.