medium · Asset-Backed Securities
In a 'Two-Tier' ABS structure, the intermediate 'depositor' is usually a wholly owned, bankruptcy-remote subsidiary of the originator.
Why does it covenant NOT to incur additional debt?
- To minimize the risk of its own involuntary bankruptcy
- To satisfy the 'true sale' requirements of ASC 860
- To prevent the 'shifting interest' of senior bondholders
- To ensure it remains a 'disregarded entity' for tax purposes
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