Module 64: ABS Flashcards
(21 cards)
What are Covered Bonds?
These are securities often issued by financial institutions institutions
- Pool of loans (typically mortgage loans) that are kept on the balance sheet but are segregated from other assets (but not sold to an SPE)
- Covered Bonds are issued by the bank and investor who buy this, recieve payments by the bank and only if the bank defaults on it’s obligations to pay, will the collateral be used to make payments to investors.
What happens in case of default of the issuer?
The investors have dual recourse of claims:
1) Can claim money on the cover pool
2) Reclaim any other unencumbered asset of the issuer
What are cover bonds used for?
USed to financial renewable energy projects/infrastructure.
What are typical charactersitics of covered bonds?
1) One class of bond in the cover pool
2) Cover pool would be monitored for performance and compliance of standards
What happens to loans that have dropped in the standards
They must be prepaid by the issuer to ensure adequate cashflows until the cover bonds maturity,
How do you lower the risk to investors?
- Overcollateralisation
- Loans included in cover pod must meet standard (Loan needs to be lower than house value)
What are different types of redemption regines?
- Hard Bullet Covered Bond: If payments to investor fails, then payments are accelerated to other bondholders
- Soft Bullet Covered Bond: Bond default and payment acceleration is postponed until the the new maturity date is set
- Conditional pass-through covered bonds: Is there are misspayments these bonds will convet to pass through after the original maturity, (gives you payments from the borrowers)
What are the three main forms of internal credit enhancements for ABSs?
Overcollateralization: The value of the collateral exceeds the face value of the ABS issued. This provides a buffer against defaults.
Excess spread: Higher income earned on the collateral than the coupon promised to ABS investors. This excess income acts as a reserve to absorb credit losses
Subordination (credit tranching):The ABS is structured with multiple tranches (classes of securities) with different priorities of claims to cash flows. Subordinated tranches absorb losses first, protecting senior tranches.
What is a “waterfall structure”?
In liquidation, each subordinated tranche receives only the “overflow” from more senior tranches after they are repaid in full.
What are two examples of non-mortgage asset-backed securities (ABS)?
Credit card receivables and residential solar ABSs.
What is the key distinction between amortizing and non-amortizing loans?
Amortizing loans have a scheduled principal repayment over the loan’s life; non-amortizing loans do not.
Are credit card receivables amortizing or non-amortizing?
Non-amortizing.
What is a lockout/revolving period in a credit card ABS?
A period where investors only receive interest and fees; principal payments are used to buy additional receivables.
A borrower can choose to repay principal at their discretion, but if it’s during the lockout period these principal payments will be used to purchase addiitonal credit card recievables, keeping it the same size
What are Solar ABSs?
Asset-backed securities collateralized by loans to homeowners financing solar energy system installations.
What makes Solar ABSs attractive to ESG investors?
They provide funding for renewable energy projects, aligning with environmental and social goals.
What is a pre-funding period in a Solar ABS?
A period after the ABS is issued where the trust can invest in additional solar loans, allowing for a larger, more diversified pool of investments.
What is a Collateralized Debt Obligation (CDO)?
A structured security issued by an SPE where the collateral is a pool of debt obligations. A collateral manager actively manages the collateral pool.
What are three major types of CLOs?
Cash flow CLOs: Payments to CLO investors are generated through cash flows on the underlying collateral.
Market value CLOs: Payments to CLO investors are generated through trading the market value of the underlying collateral.
Synthetic CLOs: The collateral pool exposure is generated through credit derivative contracts. In this type of CLO, the CLO trust does not take ownership of the collateral.
What is a key difference between CDOs and ABSs?
CDOs have a collateral manager who actively buys and sells securities in the collateral pool, unlike the static pool in most ABSs.
What are some tests applied to the collateral of a CDO to protect investors?
Coverage of payment obligations, overcollateralization levels, diversification, and limitations on low-rated debt.
What are two types of CDOs
Collateralized Bond Obligation (CBO): When the collateral securities are corporate and emerging market debt
Collateralized loan obligation (CLO): Collateral is leverage bank loans
