hard · Asset-Backed Securities collateral

Two equipment-lease ABS pools are identical in WAC, term, and expected default rate, but Pool A's leases carry large contractual residual values (lessee may walk at maturity) while Pool B's are full-payout (no residual). Modeling both with the same default and recovery assumptions, the residual structure of Pool A most critically requires the analyst to:

1. Model residual realization as a separate, equipment-value-driven cash flow whose shortfall is a loss even with zero lessee defaults, because the booked residual may not be recovered at lease end
2. Apply a materially higher default probability assumption to all of Pool A, since lessees holding a walk-away option are presumed to default more frequently throughout the lease term
3. Discount Pool A's projected cash flows at a meaningfully higher rate than Pool B's, because residual cash flows are treated as structurally subordinated within the trust's overall payment waterfall
4. Treat Pool A's contractual residual as a fully guaranteed balloon payment equivalent to scheduled principal, since the lessee is obligated to purchase the equipment outright at the stated residual value

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