medium · Asset-Backed Securities tranching
In a 'multiples' approach to AAA credit enhancement sizing, why might a subprime auto pool have a lower multiple (e.g., 2.5×) than a prime auto pool (e.g., 5.0×)?
- The 'base case' loss for subprime is already very high, and the absolute level of stress is the limiting factor.
- Prime auto loan pools generally exhibit substantially higher voluntary prepayment risk than typical subprime auto pools.
- Subprime auto loan borrowers are statistically less likely than prime borrowers to default during a downturn.
- Subprime pools always generate substantially more excess spread, which fully offsets the need for hard credit enhancement.
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