medium · Asset-Backed Securities waterfalls
A stylized Auto ABS deal has reached month 24. The cumulative net loss (CNL) is 1.80%. The transaction documents state that the step-down condition requires a CNL of less than 1.50%.
How does the principal waterfall behave in month 25?
- It remains sequential, paying only the senior-most outstanding tranche
- It flips immediately to pro-rata pay across all rated tranches
- The servicer automatically exercises the cleanup call right away instead
- Excess spread is released directly to the residual equity holder instead of trapped
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