hard · Asset-Backed Securities asset-nuances
A FFELP ABS trust has assets indexed to 1-month LIBOR plus a 2.49% SAP spread, but the bonds are indexed to 3-month LIBOR plus a fixed spread.
If 1-month LIBOR falls relative to 3-month LIBOR, what is the effect?
- The 97% federal guarantee will automatically be triggered to cover any resulting shortfall in bond interest payments.
- The servicer will be contractually required to swap the underlying indexes so the bonds remain priced at par.
- The trust's net excess spread will compress because asset yield is falling faster than bond interest expense.
- The SMM of the pool will rise sharply as borrowers rush to consolidate into newly cheaper fixed-rate loan products.
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