medium · Asset-Backed Securities tranching
If a transaction has an 'OC Step-up' trigger based on cumulative losses, what happens to the excess spread when the trigger is breached?
- It is used to pay a special 'step-up' coupon premium to the senior bondholders only.
- It is returned in full to the underlying borrowers as a cash rebate for their performing loans.
- It is trapped within the trust to pay down bond principal until the new OC target is met.
- It is permanently forfeited by the residual certificate holder in favor of the Class A note investors.
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