medium · Asset-Backed Securities
An investor is analyzing the 'unguaranteed' portion of an SBA 7(a) loan securitization.
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?
- The bond will surely default, since the loss-to-enhancement ratio is far too thin a structural cushion.
- The bond is entirely risk-free, since it carries the full faith and credit of the U.S. federal government.
- The bond is likely protected as enhancement exceeds expected losses, but timing and excess spread are critical.
- The hard enhancement will grow automatically to roughly 14% via the SBA's Special Allowance Payment rate mechanism.
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