INCLUSION OF STRUCTURAL PROTECTION TRIGGERS
Structural protection triggers are basically preventive provisions in a structure to take care of imminent weaknesses in the transaction. As emphasized earlier, there is no management that might deal with problems that may occur after the transaction is completed. Therefore, the mechanisms/procedures for dealing with problems that might arise over the life of the structure must be specified at the time of issuance. A structural protection trigger provides that if certain pre-specified weaknesses arise in the transaction, the structure of the transaction will be modified in a certain manner. Here are three examples of structural protection triggers:
• If the cumulative losses reach or exceed a level of x%, then the excess spread available to the originator will be not be distributed to the originator but be trapped to either create or increase the cash reserve.
• If the cumulative losses reach or exceed a level of x%, then to increase the credit enhancement to the senior bond classes the pay-down method will be altered from proportional to sequential.
• If the cumulative losses reach or exceed a level of x%, to increase the credit enhancement to the senior bond classes there will be a lockout on the coupon payments to the subordinated classes.
It should be noted that protective triggers in a structure are similar to the dividend suspension, acceleration, or similar covenants found in loan agreements.
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