Where does the residual value of the Successor Borrower come from?
As mentioned elsewhere in this FAQ, mismatches exist in timing between cash receipts from the defeasance collateral (coupon payments or bond maturities) and cash payments (loan obligations) over the life of the defeased loan. The rules governing the structuring of the defeasance collateral stipulate that interest earned by the Successor Borrower due to this mismatch in timing cannot be applied toward scheduled loan payments (zero reinvestment income must be assumed when structuring the portfolio). These interest amounts accumulate over time and represent the residual value of the defeasance transaction. The largest part of the residual value typically arises from the mismatch of the loan maturity date and the maturity date of the Treasury that matures closest (but prior to) that date. In some cases, this may be a mismatch of several months. This large balloon payment may sit in the Successor Borrower account accumulating interest for several weeks or even months. Recover the residual v
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- Where does the residual value of the Successor Borrower come from?