medium · Asset-Backed Securities asset-nuances
A 500 million pool of SBA 7(a) loans is being securitized. The issuer sells the 75% guaranteed portion as 'Pool Certificates' and retains the 25% unguaranteed portion.
How do these two pieces differ in their primary risk profile?
- The unguaranteed retained portion is protected against pool credit losses by the publicly sold 'Pool Certificates' via subordination.
- Pool Certificates carry materially higher credit risk than the retained unguaranteed piece solely because they are sold to public bond investors.
- Pool Certificates carry U.S. government credit risk and focus on prepayment; the unguaranteed portion carries pure small-business credit risk.
- The guaranteed portion typically carries a fixed coupon rate, while the unguaranteed retained portion is structured with a floating-rate coupon tied to Prime.
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