A newly issued 5 year, $500 million ABS offering has the following “waterfall” p

Question

A newly issued 5 year, $500 million ABS offering has the following “waterfall” provisions:

Maximum loss:

·       Lowest subordinated tranche ($200 million)

·       Mid-level subordinated tranche issue ($150 million)

·       Highest subordinated tranche ($100 million)

·       Senior level debt ($50 million)

Complete the following table:

What is the amount of loss for each ABS tranche if losses due to defaults over the life of the issue are: a. $100 mil b. $250 mil c. $400 mil Senior Class Subord High Subord Mid Subord Lovw

Explanation / Answer

Maximum loss:

Lowest subordinated tranche ($200 million)

Mid-level subordinated tranche issue ($150 million)

Highest subordinated tranche ($100 million)

Senior level debt ($50 million)

If there is a loss then lowest subordinated tranche will get hit first, then mid level subordinated tranche, then highest subordinated tranche and at the the end senior debt will take the hit.

Scenario 1:

Loss = 100 million

Amount of Loss for each tranche:

Senior Class 0

Subord High 0

Subord Mid 0

Subord Low 100 million

Scenario 2:

Loss = 250 million

Amount of Loss for each tranche:

Senior Class 0

Subord High 0

Subord Mid 50 million

Subord Low 200 million

Scenario 3:

Loss = 400 million

Amount of Loss for each tranche:

Senior Class 0

Subord High 50 million

Subord Mid 150 million

Subord Low 200 million

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