hard · Asset-Backed Securities
An issuer calculates a total fair value of $1,000 million for a deal. They plan a horizontal retention of $50 million fair value. However, the senior bonds are issued at a significant premium, increasing total fair value to $1,050 million.
What is the impact on the retention requirement?
- The issuer can subtract the premium from the retention obligation to maintain a $50 million baseline.
- The requirement remains $50 million because retention is based on par value at closing.
- The requirement decreases because the premium represents lower perceived risk in the market.
- The $50 million retention is now insufficient; it must be increased to $52.5 million.
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