medium · Asset-Backed Securities waterfalls
An Auto ABS waterfall has two priorities for principal: 'First-Priority' and 'Second-Priority'.
What is the typical purpose of 'First-Priority' principal in a senior-sub structure?
- To fund the residual holder's monthly dividend distribution before any senior or subordinate bond principal has been paid down for that collection period.
- To pay principal to the senior tranches to the extent that the bond balance exceeds the pool balance (i.e., protecting against an under-collateralized state).
- To reimburse the servicer for any previously unreimbursed advances of delinquent principal and interest made on behalf of the trust in prior periods.
- To pay principal to the most junior subordinate tranche first among the classes, ensuring it amortizes fastest and remains outstanding for the shortest possible duration.
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