Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Payout Event

What it is:

A payout event refers to the accelerated repayment of bond principal, usually on an asset-backed security (ABS).

How it works (Example):

A payout event is also referred to as early amortization or early calls.

A payout event normally happens when the amount of delinquencies on the loans underlying an ABS suddenly increases. Also, it can happen when the issuer's net profit after servicing fees, charge-offs, and other costs drops below a certain level or when the sponsor or the servicer declares bankruptcy.

When a payout event occurs, all principal and interest payments are paid to investors regardless of the intended schedule for the return of the principal. Once a payout event occurs, it cannot be taken back or undone.

Why it Matters:

A payout event is a way for investors to alleviate the effects of declining credit performance or a liquidity crisis. Most rating agencies require asset-backed securities to provide payout event language as criteria for rating the debt. Though this lowers the risks associated with asset-backed securities, payout events themselves contain risks in that an investor may not earn all the interest promised over the life of the security if a payout event happens.