hard · Asset-Backed Securities tranching
An ABS waterfall has sequential OC release: overcollateralization steps down on scheduled dates ONLY if (i) the OC target is met and (ii) a cumulative-loss trigger and a delinquency trigger are both passing. Consider a month where the OC actual exceeds target and the cumulative-loss trigger passes, but the rolling delinquency trigger fails. The structure pays senior interest, then senior principal to target, then — if all release conditions pass — releases the OC surplus to the residual; otherwise surplus is trapped as additional senior principal.
What is the correct cash-flow consequence this month, and its effect on senior WAL?
- The release is blocked, so the surplus turbos into senior principal, shortening senior WAL relative to a clean-release month
- The release proceeds because OC and the loss trigger pass, and a delinquency-only failure does not block a release once OC is above target
- The surplus is split: half released to the residual and half trapped, since only one of two triggers failed
- The surplus is held in the reserve account rather than applied to senior principal, leaving senior WAL unchanged this month
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