hard · Asset-Backed Securities
A $500M subprime auto pool is analyzed with a base case lifetime loss expectation of 10.0%. To achieve a AAA rating, the agency applies a 4.5x loss multiple.
If the structure includes 8.0% in hard credit enhancement and expects 12.0% in lifetime excess spread (stressed), does the senior tranche pass the AAA stress?
- No; hard credit enhancement must be at least 50% of the stressed loss.
- Yes; 20.0% protection is sufficient for a prime-originator profile.
- No; total protection (20%) is less than the stressed loss requirement (45%).
- Yes; the 12.0% excess spread is sufficient to cover the 10.0% base loss.
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