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What is a Payout Event?

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

How Does a Payout Event Work?

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 Does a Payout Event Matter?

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.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.