17 Fixed-Income Securitization

For an investor evaluating ABS issued by a bankruptcy-remote SPE, which source of risk is most likely to be the primary focus?

Ahbaling Trust has a collateral pool of SGD 400 million and bond classes of SGD 280 million senior plus two subordinated classes of SGD 60 million each. What percentage of the collateral pool can be lost before the senior class begins absorbing losses?

Which of the following statements about a true securitization is most likely correct?

Assertion (A): Securitization can reduce an issuer's funding cost relative to traditional financing methods.
Reason (R): By pooling securitizable assets and moving customer loans off balance sheet, a company may access funding without increasing its own leverage in the same way.

In the Bright Wheel Automotive cash flow illustration, the first-year investor payment combines EUR 27.9 of principal and EUR 4.8 of interest. The total first-year payment is most likely:

Assertion (A): The purchase agreement is the document that sets out the seller's representations and warranties about the assets sold.
Reason (R): The prospectus is the document that details those representations and warranties.

Assertion (A): Trustee cash flow reports are central to investors who want to update the credit standing of an ABS.
Reason (R): These reports are optional disclosures prepared mainly for the originator's internal management use.

Which of the following statements about securitization's impact on economies and financial markets is least likely correct?

If an originator issues new corporate bonds after having sold receivables to an SPE, which of the following statements is most likely correct?

BRWA's securitized pool has an outstanding principal balance of EUR 1,000 million and the underlying loans are fully amortizing over 48 monthly payments. Ignoring fees and timing differences, the average principal repaid per month is closest to:

In the SESAC example, the fixed-rate note was USD 530 million and the floating-rate note was USD 30 million. The fixed-rate note's share of the total securitization was closest to:

Assertion (A): Pass-through securities are true securitizations.
Reason (R): Covered bonds are not full securitizations because the underlying assets remain on the issuing bank's balance sheet.

Consider the following:
I. Securitization allows investors to tailor interest rate and credit risk exposures.
II. Securitization directly improves the borrowers' creditworthiness.
III. Investors usually must originate and service the underlying loans themselves.
How many of the above are benefits to investors?

Consider the following:
I. Securitization provides an alternative means of funding business operations beyond bonds, preferred equity, and common equity.
II. Securitization reduces funding costs by forcing companies to keep customer loans on their own balance sheets.
III. Securitization decreases secondary-market price discovery by replacing tradable securities with loans.
How many of the above statements are correct?

Car Loan Trust holds 45,000 loans with an average balance of EUR 22,222. Before rounding to the nearest million, the pool's outstanding principal balance is most likely closest to:

If a securitized pool must total exactly EUR 1,000 million and contains 45,000 equal-average loans, the average balance per loan is most likely:

Consider the following:
I. Selling securitized assets can generate fee income for banks.
II. Securitization requires banks to retain all lending risk in order to expand origination.
III. Securitized debt must be illiquid to help long-term investors match liabilities.
How many of the above statements are correct?

Which of the following functions of the prospectus in a securitization is most likely correct?

Consider the following:
I. The underlying mortgage loans remain on the issuing bank's balance sheet.
II. Covered bond investors receive payment directly from the bank rather than from the specific pool's cash flows.
III. Covered bonds are full securitizations because the assets are transferred to a separate SPE.
How many of the above statements are correct?

Which of the following is least likely to be a benefit of securitization for investors?

Consider the following:
I. After the sale, the SPE becomes the ultimate owner of the loans.
II. If the originator enters bankruptcy, its creditors ordinarily have claims on assets held in the bankruptcy-remote SPE.
III. Investors should evaluate the legal framework of the jurisdiction in which they purchase ABS.
How many of the above statements are correct?

Assertion (A): In most jurisdictions, courts can freely change tranche seniority after the originator enters bankruptcy.
Reason (R): In a securitization, the originator's bankruptcy generally does not affect the SPE, so courts in most jurisdictions have no discretion to change seniority on that basis.

Assertion (A): Securitization can improve overall liquidity in the financial system.
Reason (R): Corporate issuers often extend credit to customers through financing subsidiaries.

Assertion (A): After a true sale to a bankruptcy-remote SPE, ABS investors are primarily exposed to the borrowers' default risk.
Reason (R): If the borrowers continue making interest and principal payments, the SPE's ability to pay security holders remains intact even if the originator fails.

Which of the following statements about the benefits of securitization for issuers is most likely correct?

Consider the following:
I. Pass-through securities are true securitizations.
II. Bonds with structural enhancements redistribute pool cash flows across specified tranches according to a preset schedule.
III. Subordinated tranches assume greater risks of default and repayment-pattern changes than higher tranches.
How many of the above statements are correct?

Using Ahbaling Trust's structure, suppose cumulative losses on the collateral reach SGD 70 million and all losses are absorbed by subordinated classes before the senior class. The subordinated protection still remaining ahead of the senior class is most likely:

Consider the following:
I. The purchase agreement sets out the seller's representations and warranties about the assets sold.
II. The prospectus describes payment priority and the credit enhancements used.
III. Trustee cash flow reports are the only source investors use to update the ABS credit standing.
How many of the above statements are correct?