What it is:
How it works (Example):
An early call usually takes place when the number 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 an early call occurs, all principal and interest payments are made to investors regardless of the stated schedule for the return of the principal. Once an early call happens, it cannot be undone or reversed.
Why it Matters:
Early calls are a way for investors to lessen the effects of declining credit performance or a liquidity crisis. Most rating agencies requier asset-backed securities to disclose early call provisions when they rate the debt. Though this lowers the risks associated with asset-backed securities, early calls contain risks. An investor may not earn all the interest promised over the life of the security if an early call happens.