medium · Asset-Backed Securities waterfalls
In a subprime auto ABS transaction (e.g., Autumn Finance 2026-A), the 'Overcollateralization (OC) Build' phase is active for the first 6 months.
If cumulative net losses (CNL) reach 1.5% in month 5, exceeding the trigger threshold of 1.2%, what is the impact on the waterfall?
- The OC target is increased, and all excess spread is diverted to pay down senior bonds until the new target is met.
- The transaction immediately enters 'Rapid Amortization,' and the loan servicer is terminated without any cure period.
- The reserve account is fully released to subordinate bondholders despite the ongoing trigger breach event here.
- The residual holder receives a 'catch-up' payment covering every previously missed distribution from prior collection periods.
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