principal deficiency ledger

England, Wales

Where the securities, or notes, issued in a securitisation are to be repaid in a single bullet repayment at the end of the transaction, it makes commercial sense that, as long as interest on the notes continues to be paid, losses suffered by the securitised assets be recorded but are otherwise given time to be remedied over the life of the deal. Accordingly, deals often provide that losses on the underlying assets be recorded in a ledger that nominally writes down the face value of the notes, starting with the most junior notes first. If the issuer subsequently receives extra income, then this will go towards writing back up the relevant notes to their original face value, but this time starting with the most senior notes first. This mechanism is therefore effective in distributing the risk of principal losses among noteholders in reverse order of seniority. The relevant ledger is known as a principal deficiency ledger and generally includes a series of sub-ledgers, one for each class of notes.

For more information on redistributing the risk of default in a securitisation, see Practice note, Securitisation: overview: box, Restructuring of the risk profile (www.practicallaw.com/7-202-1177).