Underlying loans will generally be subject to ongoing portfolio testing to ensure they meet performance ratios and concentration limits. As a general rule, a test error relieves the lender of any obligation to purchase additional credits as part of an advance flow or prepayment or an acceleration of the priority loan or bonds in the event of inventory financing. It is clear that the early termination of funding agreements will seriously affect the author and his or her ability to serve clients and will therefore require a thorough review during negotiations. Other events leading to the early cancellation of financing agreements may include changes in control, loss of key persons, ongoing violations of agreements or guarantees, loss of administrative authorizations by the author or service provider, which could affect the applicability and recovery capacity of mortgage assets and insolvency events. The author`s profitability varies considerably between the two structures. An advance stream allows an initiator to use the funder`s balance sheet to obtain credits for an origin and service fee. Origination fees will often be a percentage of the mortgage`s initial primary advance, with an additional percentage to be paid in deferred consideration if the mortgage assets meet the performance targets. Maintenance costs are generally a percentage of the outstanding principal balance, with higher costs for the maintenance of failing or delinquent assets. For the funder, the return should be higher than if he provided a storage line given the increased credit risk. As far as the structure is concerned, a cash flow agreement usually involves a direct purchase by the lender of credits advanced by an initiator in accordance with the eligibility criteria. The economic and financial interests on the loans are transferred to the lender on the first day, the legal interest being only after the triggering events related to the performance and solvency of the initiator or service provider. This gradual transfer of legal title and benefit title to mortgage assets is consistent with securitization and investment fund transactions that sell securitization receivables (SPV) without first notifying the underlying debtors.
Indeed, from a client`s point of view, there is little difference between the cash flow-financed loan compared to an inventory structure or a securitization refinancing. “Fast-flow transactions allow companies to sell unpaid invoices to a collection company at specified intervals and at an agreed price,” explains Yves Van Nieuwenburg, sales manager at EOS Contentia in Belgium. “This is a potential win-win situation. Our partner sells its debts at regular intervals and receives money for debts that have not yet been settled until the end of their internal collection process. And for EOS too, the transaction is profitable: “Because we carefully calculate any recovery costs. Underlying loans generate cash flow for investors – based on their performance, investors receive weekly interest payments. When an underlying credit matures, is repaid or is more than 60 days late, it is replaced by a new loan. If the credit company is unable to replace the underlying loan, it will repay the entire flow and the money will be returned to the investors. Example: an investor has invested as part of a cash flow agreement that contains 3 underlying credits. In the past week, the loan has received 1,10 euros in principal and 2 euros in interest. Loan 2 received 5 euros of capital and 1 interest.
Loan 3 did not receive interest or capital. For this week, the investor is credited with 3 euros of interest, and 15 euros of capital remains in the cash flow. Although large-scale flow agreements are generally fairly personalized and private, it is possible to get an overview of some of the common structures and concepts that have been observed recently.