easy · Asset-Backed Securities tranching
How does 'Subordination' create credit enhancement in a multi-class auto ABS?
- Losses are allocated 'bottom-up', meaning the junior-most class is wiped out before the senior classes experience any loss of principal.
- Junior classes are paid their scheduled interest ahead of the senior classes, providing an ongoing cushion for the senior coupon in each period.
- The originator is contractually required to repurchase any loan that the junior-tranche bondholders deem unacceptable upon review.
- It requires the loan servicer to advance its own corporate cash whenever borrowers miss a scheduled monthly payment on the underlying loan.
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