medium · Asset-Backed Securities asset-nuances
A student loan ABS is currently in its revolving period. The early amortization trigger is defined as the 3-month rolling average excess spread falling below 0.00%.
If the extension of loan terms via IBR causes the portfolio yield (Gross Yield) to drop from 9.0% to 6.5% while charge-offs stay at 1.5% and the base rate (bond coupon + servicing) is 5.5%, what is the resulting status of the trigger?
- The trigger will not breach because IBR loans are not counted as charge-offs.
- The trigger will likely breach because the excess spread falls to -0.5%.
- The trigger will not breach because the net yield (5.0%) still exceeds the bond coupon.
- The trigger will breach immediately even if the yield is 7.5%.
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