hard · Asset-Backed Securities asset-nuances

After applying a standard 10% liquidation cost assumption, what is the Appraisal Reduction Amount (ARA), and which bondholders are first affected by the resulting interest shortfalls?

1. The ARA is $30 million; the senior AAA bondholders experience immediate interest deferral so that cash flow is preserved for the Special Servicer's ongoing workout expenses and legal costs.
2. The ARA is $40 million; the Master Servicer remains contractually required to continue advancing full interest to every tranche until the underlying property is eventually sold at liquidation to a buyer.
3. The ARA is $10 million; it only affects the 'IO' (Interest-Only) tranches directly and has essentially no meaningful impact whatsoever on the principal-paying senior or mezzanine bond classes in the deal.
4. The ARA is $37 million; interest shortfalls begin at the most subordinate class (e.g., Class NR or Class B) and move upward as the reduction consumes the 'interest-bearing' balance of the stack.

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