medium · Asset-Backed Securities waterfalls
In a conduit CMBS transaction, a $50M loan is defaulted and an appraisal reduction amount (ARA) of 15M is determined. The most subordinate bonds are Class F (10M) and the unrated residual (5M).
How will interest distributions be affected for the subordinate classes?
- Only the principal balance of the bonds is reduced, while interest remains unaffected.
- Interest on the $15M reduced portion is stopped for both the residual and Class F.
- Interest continues to flow to all classes until a realized principal loss is booked.
- The $15M reduction is allocated pro-rata across the entire capital stack.
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