hard · Asset-Backed Securities tranching
A $500M subprime auto pool is analyzed with a base case lifetime loss expectation of 10.0%. To achieve a AAA rating, the agency applies a 4.5x loss multiple.
If the structure includes 8.0% in hard credit enhancement and expects 12.0% in lifetime excess spread (stressed), does the senior tranche pass the AAA stress?
- No; hard credit enhancement alone must equal half the stressed loss.
- Yes; the 20.0% total protection suffices for this prime-originator profile.
- No; total protection (20%) is less than the stressed loss requirement (45%).
- Yes; the 12.0% stressed excess spread is enough to cover the 10.0% base case loss.
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