medium · Asset-Backed Securities regulatory
If an auto ABS deal is structured with 15.00% credit enhancement but the rating agency determines the break-even loss rate is only 13.50% under AAA stress, which of the following is most likely true?
- The deal will likely be upsized to take full advantage of that excess credit enhancement.
- The rating agency will simply lower its published loss multiple so the deal can still achieve a AAA rating.
- The excess 1.50% of credit enhancement would simply be returned to the originator as a gain-on-sale.
- The senior tranche will likely be rated lower than AAA because it fails the required stress test.
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