medium · Asset-Backed Securities asset-nuances
An equipment lease ABS analyst is evaluating a pool of commercial trucks. The 'Finance Lease' portion is 60% and the 'Operating Lease' portion is 40%.
If truck resale prices collapse by 50%, which portion of the capital stack is most likely to experience a principal loss?
- The residual/equity piece and the most junior rated tranches, due to residual value shortfalls.
- The AAA senior bonds absorb losses first, since finance leases carry no enhancement.
- No principal loss occurs at all, because finance leases make up the pool's majority at 60%.
- The entire pool absorbs the loss equally, with total losses spread pro-rata across every rated bond tranche.
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