easy · Asset-Backed Securities

A 'cleanup call' is a common feature in auto ABS. If the deal allows for a cleanup call at 10%, what occurs when the pool balance reaches $95 million on an original pool of $1 billion?

1. The servicer has the option to redeem all outstanding bonds at par and terminate the trust.
2. The waterfall reverses, and all cash is paid to the residual holder before the bondholders.
3. The rating agencies automatically downgrade all senior tranches to 'junk' status.
4. The trust must immediately purchase $905 million of new loans to refill the pool.

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