medium · Asset-Backed Securities asset-nuances

If the pool has an expected cumulative net loss of 4.8% and the structure provides 7.0% in hard credit enhancement, how should the investor evaluate the risk to the senior-most unguaranteed bond?

1. The bond will surely default, since the loss-to-enhancement ratio is far too thin a structural cushion.
2. The bond is entirely risk-free, since it carries the full faith and credit of the U.S. federal government.
3. The bond is likely protected as enhancement exceeds expected losses, but timing and excess spread are critical.
4. The hard enhancement will grow automatically to roughly 14% via the SBA's Special Allowance Payment rate mechanism.

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