medium · Asset-Backed Securities collateral
A pool of $100,000,000 in auto loans has Overcollateralization (OC) of $10,000,000.
If the pool experiences $12,000,000 in lifetime cumulative net losses, what is the impact on the bondholders?
- The full $12,000,000 in losses will be shared pro-rata between the OC and the rated bonds.
- The bonds take no loss whatsoever, because OC is not considered a hard form of credit enhancement.
- 2,000,000 in principal losses will be allocated to the bonds (starting with the most junior).
- The servicer will simply advance the entire $12,000,000 shortfall permanently to cover the bondholders.
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