Theory Flashcards
(96 cards)
1
Q
Credit risk
A
risk of economic loss resulting from borrower failure to make full and timely payments of interest and principal. Risk like inability to sell collateral at mkt price sufficient to meet issuer’s obligation in case of secured debt or potential incurrence of legal or other cost to collect debt are also credit risk faced by lenders. The key components of credit risk are the probability of default and the loss given default, and their product is expected loss.
2
Q
Credit ratings
A
enable comparisons of the credit risk of debt issues and issuers within and across industries. are not used to determine bond price. Issued on behalf of issuer.
3
Q
Risk difficult to capture in CR
A
litigation risk, environmental risk, and natural disasters. Leveraged transactions, such as debt-financed acquisitions (i.e., changes in the capital structure through large stock buybacks), are often difficult
to anticipate and thus to capture in credit ratings. Rating agencies may view complex risks very differently, resulting in divergent or split ratings between the agencies.
4
Q
Non investment grade
A
Speculative grade or High yield bond
5
Q
Pitfalls of relying solely on credit ratings
A
rating agency decisions may lag market pricing of credit risk, overlook key financial risks, and/or involve miscalculations or unforeseen changes not fully captured in a rating agency’s forward-looking analysis.
6
Q
The premium, or yield spread, at which corporate bonds trade relative to default risk-free assets widens
A
when credit risk rises and narrows if credit risk falls. Because investor is fairly compensated when expected loss = credit spread. Bond prices and credit spreads often move faster than rating agencies
change their ratings (or ratings outlook) in response to changes in perceived
creditworthiness. Credit spreads change daily, whereas bond ratings, appropriately,
change less frequently
7
Q
Credit spread changes affect holding period returns via two primary factors:
A
a) the basis point spread change and b) the sensitivity of price to yield as reflected by end-of-period modified duration and convexity. Spread narrowing increases holding period returns. At top of credit cycle spread is usually lower due to low credit risk
8
Q
Credit Spread Risk
A
Risk of greater expected loss due to changes in credit conditions as a result of
macroeconomic, market, and/or issuer-related factors. Credit Spread is the spread an investor receives above risk free rate
9
Q
Expected Loss
A
POD x (Expected exposure) x (1 - RR) = LGD x POD
10
Q
POD driven by an issuer’s ability to service debt
A
based on both qualitative and
quantitative factors including Profitability, Leverage & Coverage
11
Q
Expected Exposure (Exposure @ default). It is already net off collateral. But qn might give collateral separately pg 342
A
amount an investor may expect to lose in the case of default, which is usually
equal to the loan or bond face value plus accrued interest less the current market
value of available collateral.
12
Q
Loss Given Default (% or $)
A
(Expected Exposure) x (1 - RR). Is largely a function of the nature and seniority of a creditor’s claim in a default scenario
13
Q
Loss severity
A
1 - RR
14
Q
For larger spread changes, the effect of convexity needs to be incorporated into
the approximation
A
%ΔPVFull = −(AnnModDur × ΔSpread%) + ½AnnConvexity × (ΔSpread%)^2
15
Q
small, instantaneous change in yield spread
A
%ΔPVFull = −AnnModDur × ΔSpread
16
Q
8 Cs of credit analysis
A
Capacity & Capital (Quantitative), Collateral, Covenants & Character (Qualitative), Condition, Currency & Country (general top down factors)
17
Q
Source of Repayment
A
Unsecured Bond (CFO), Secured Bond (CFO & Collateral’s CF or sale) & Sovereign Bond (Tax revenue)
18
Q
Illiquid vs Insolvent Borrower
A
Unable to raise the necessary funds to fulfill a debt obligation. They may not be able to tap credit lines, sell assets, or otherwise raise funding to make a timely debt payment vs whose assets are worth less than its liabilities
19
Q
Credit migration risk (Downgrade risk)
A
risk that a bond issuer’s creditworthiness deteriorates, or migrate to lower rating
20
Q
Important points
A
credit ratings primarily seek to assess expected loss, the market pricing of credit risk for distressed bonds is primarily focused on default timing and expected recovery rates. Credit rating outlooks tend to be more closely aligned with market
conditions than credit ratings. The longer the maturity, the higher the yield, as default risk tends to rise for longer maturities. Yield spread difference between IG bond ratings is generally narrower than the difference between IG and HY.
21
Q
Reason for investing in HY bonds
A
Portfolio Diversification, Capital appreciation (Invest in eco downturn), Equity like return with low volatility
22
Q
Mkt liquidity risk (TC associated with selling a bond)
A
Risk that price at which investor can actually transact differ from price indicated in mkt through bid-ask spread
23
Q
Issuer specific factor that affect mkt liquidity risk
A
Issuer size & Issuer credit quality
24
Q
Liquidity spread
A
difference in the bid yield and the offer yield
25
Non-sovereign debt
Doesn't mean corporate debt. Issued by a local government or entity, backed by its ability and willingness to tax, or revenue from a specific public project
26
Principle of sovereign immunity
willingness to pay. Sovereign immunity means investors face limitations in forcing a sovereign government to declare bankruptcy or liquidate its assets to settle debt claims as would be the case for a corporate issuer. Sovereign immunity limits the legal recourse of bondholders in many instances, preventing external creditors from fully enforcing debt claims.
27
Revenue bonds
issued to finance a specific public benefit
project, mostly supported by the local/regional government. The revenue from the project supported by the economic base for utilization of the project determines its credit worthiness. DSCR is used
28
General obligation (GO) bonds
unsecured bonds backed by the general revenues of the issuing non-sovereign government. These bonds are supported by the taxing authority of the issuer, rather than the revenue from a specific project.
29
Qualitative factors in sovereign credit worthiness
Government Institutions & Policy - Stable, Predictable Executive, Legislative and Judicial Institutions and Policies/ Willingness to Pay/Rule of Law
Fiscal Flexibility - Ability to Adjust Revenue and Exp/Fiscal Discipline/ Prudent Use of Debt
Monetary Effectiveness: Policy Credibility/Exchange Rate Regime/Financial System and Debt Market Development. Central bank independence from the public Treasury reduces the likelihood that a sovereign government will monetize their domestic debt, driving domestic inflation higher and reducing the external value of the domestic currency.
Economic Flexibility - Economic Diversification/ Competitiveness/ Adaptability to Shocks
External Status: Global Currency Status/
Access to External Funding/ Geopolitical Risk
30
Quantitative Factors in Sovereign Creditworthiness
Fiscal Strength - Debt Burden & Affordability
Eco Growth & Stability - Eco growth, Cyclicality , Size & Income Level. (Real GDP Growth, GDP in PPP, Real GDP volatility, Per capita GDP)
External Stability - BOP, External Debt Burden (LT External Debt to GDP, External debt due in 12m to GDP) & Currency Reserves (FX Reserves to GDP, to External Debt).
31
Agencies
quasi-government entities whose primary activities are to fulfill a government-sponsored mission to provide public services, often based upon a specific
sovereign law or statute. Usually assume a high likelihood of sovereign government support, and rating agencies typically grant the same rating to these entities as the sovereign entity.
32
Two senior unsecured bonds of the same issuer of different maturities have same rating irrespective of maturity
An issuer rating usually applies to its senior unsecured debt and is meant to address an obligor’s overall creditworthiness. All senior unsecured bonds are treated as one class and rank pari passu irrespective of maturity. Therefore, both the issuer and the issue credit ratings are the same.
33
Secured lenders prefer to have
tangible asset as collateral (Hard coll)
34
Red flags in analysis
Aggressive accounting policies, Changing auditors or CFOs frequently
35
Preference of debt holders vs equity holders
Low leverage (because upside benefit is limited) vs High leverage (because high risk usually involves high return & upside is unlimited)
36
Key financial ratio for credit worthiness
Profitability - EBIT margin
Coverage - EBIT to Int exp
Leverage - Debt to EBITDA, Retained CF to Net Debt (Debt - C&CE)
37
Fund from Operation
Net income from continuing operations (+) D&A, deferred IT, other non-cash item
38
Retained CF
Net CFO (-) Dividends paid
39
If the value of the collateral falls short of the total amount of pari passu secured debt,
the balance will rank pari passu with senior unsecured creditors in insolvency or restructuring.
40
Recovery rates
varies by seniority ranking. All creditors at same debt seniority level are treated as one class irrespective of maturity. RR vary widely by industry, vary depending on when they occur in the cycle, and represent averages across industries and companies. When the economy is strong or improving, robust markets exist for the resale of collateral and recovery rates are therefore higher.
41
Creditors with lower seniority and even shareholders may receive consideration without more senior creditors being satisfied in full
since bankruptcy resolution takes time. By compensating subordinated debt holders, senior debt holders can accelerate the bankruptcy process.
42
Structural subordination
which can arise when a corporation with a holding company structure has debt at both its parent holding company and operating subsidiaries. Operating subsidiary debt is serviced by the cash flow and assets of the subsidiaries before funds can be passed (“upstreamed”) to the holding company to service parent level debt.
43
Notching
Process where issue credit ratings are moved up or down from the issuer rating. Generally, the higher the senior unsecured rating, the smaller the notching adjustment due to a lower perceived risk of default. That is, the need to “notch” the rating to capture the potential difference in loss severity is greatly reduced.
44
probability of default likely to be the same for all unsubordinated bonds of an issuer
Cross-default provisions exist where an event of default on one bond triggers default on all outstanding debt, implying the same default probability for all issues. However, issue ratings may differ due to LGD differences.
45
Collateralized mortgage obligations
enhance the predictability of payment patterns of pass-through securities by redistributing the cash flows in the pool across the different tranches according to a preset schedule.
46
Covered bonds
are the simplest securitization structure. The issuer segregates (but retains) the underlying loans/assets and then uses the segregated loans/assets as collateral for the covered bonds it issues. Not considered as full securitization coz SPE is not involved. Senior debt obligation. On default investors have dual recourse - collateral & unencumbered assets of issuer. It consist of one bond class per cover pool. Issuer must replace any prepaid or NPA to ensure sufficient CF until maturity of CB. If a mortgage included in the transaction fails to meet certain LTV it is replaced with another mortgage that meets the criteria.
Hard bullet CB - If payments do not occur according to the original schedule, a bond default is triggered and bond payments are accelerated. Soft-bullet CB - delay the bond default and payment acceleration of bond cash flows until a new final maturity date, which is usually up to a year after the original maturity date. Conditional pass-through CB - convert to pass-through securities after the original maturity date if all bond payments have not yet been made.
CB usually carry lower credit risk & offer lower yield compared to similar ABS. Asset in the pool are monitored by 3rd party for performance & adherence to underwriting standards
47
ABS
Typically pay floating interest rate & pass through any early payments but CB pays fixed int rate & mature on fixed date
48
Pass-through securities (true securitizations)
Asset pool is removed from BS & transferred to SPE
49
Prospectus
describes the structure of the securitization, including the priority and amount of payments to be made to the servicer, administrators, and the ABS holders, as well as the credit enhancements used in the securitization.
50
Notes issued by the SPE
are the actual ABS, not legal documents
51
Purchase agreement between the seller of the collateral and the SPE
outlines the representations and warranties that the seller makes about the assets sold.
52
Pool of assets
securitized assets, reference portfolio, collateral
53
Subordination, or tranching
involves creating more than one bond class or tranche
54
Risk in Securitization
Timing of CF (Contraction & Extension risk)
Inherent credit risk of loans backing ABS
55
Main parties to securitization
Seller of collateral (Depositor), SPE, Servicer
56
Securitization is cheaper way to raise funds
than a corporate bond issue secured by the same collateral because SPE is not affected by bankruptcy of seller of collateral
57
Collateralized Debt Obligation
CLO. CLO replicates capital structure of firm. CLO collateral purchases rely on funds obtained from debt issuance. Backed by non mortgage debts. CLO collateral purchases rely on funds obtained from the issuance of debt. It is the senior of mezzanine tranches that earn a potentially higher yield than comparable corporate bonds.
58
CBO vs CLO vs Structured finance CDO vs Synthetic CDO
Backed by corporate and emerging market bonds vs Backed by leveraged bank loans vs Backed by other CDOs vs Backed by a portfolio of credit default swaps for other structured securities. The prevailing CDO structure is the CLO structure, where the collateral pool is made up of leveraged bank loans. Structured & Synthetic CDOs are not common
59
A CDO is a
Leveraged transaction, where equity tranche holders use borrowed funds (i.e., the bond classes issued) to generate a return above the funding cost. Unlike MBS, the pools in a CDO are not static; so, there is a need for a collateral manager that buys and sells debt obligations for and from the CDO’s collateral pool to generate sufficient cash flows to meet the obligations to the CDO bondholders.
60
Equity tranche in CLO
Investors in equity tranches take on equity-like risks with the potential to earn returns comparable to equities. Moreover, these residual tranche investors play a key role in whether a CLO is viable or not; the CLO structure has to offer competitive returns for this tranche. Facing these risk/return possibilities puts them in the position of the marginal, price-setting investors.
61
Collateral Manager
For the majority of CDOs, the collateral pools are not static, so there is a need for a collateral manager that buys and sells debt obligations for and from the CDO’s collateral pool to generate sufficient cash flows to meet the obligations to the CDO bondholders. The collateral manager must continually meet various performance tests and collateral limits for the underlying collateral. If the manager fails pre-specified tests, a provision is triggered that requires the payoff of the principal to the senior bond class until the tests are met. This process effectively deleverages the CLO because the cheapest funding source for the CLO, the senior bond class, is reduced. A typical feature of CLO transactions is that the collateral portfolio is not finalized until after the transaction closes. While the collateral manager acquires most of the loans before the transaction closes, there is a subsequent ramp-up period when additional assets are added to the collateral pool. After this ramp-up period, the manager may replace loans in the portfolio as long as the new asset meets the portfolio selection criteria. Recourse is typically limited to the collateral pool, with minimal recourse to the original issuers.
62
CF CLO vs MV CLO (Sizes of tranches have greatest variability) vs Synthetic CLO (Relies on OTC Contracts)
The CF from interest payments and principal repayments are redistributed across the tranches (most common CLO structure). The value accruing to the tranches depends on the market value of the portfolio. The collateral pool is created synthetically through credit derivatives.
63
ABS term sheet
provides the face value of the tranche notes at the time of the transaction, not their market value. Includes Conditions for early amortization, Aggregate amount of collateral pool assets
64
Credit enhancement in securitization
Internal CE - Overcollateralization, Excess spread (difference between coupon on underlying collateral & coupon paid on securities), Subordination or credit tranching
External CE - Cash Collateral accounts, Financial Guarantees, LOC
65
ABS can be categorized based on
collateral (amortizing or non amortizing)
66
Non mortgage ABS
Securitizations that remove the pool of assets from the original issuer’s BS. They are generally collateralized by non-amortizing loans, such as credit card receivables, that retain their original loan value during a specific period of their life before the stated maturity date, known as the lockout or revolving period (During this period holders receive only payments from the finance charges and fees the lender
collects). During this time, principal that is repaid is reinvested to acquire additional loans with a principal equal to principal repaid. Credit card securitization generates additional fee income for the issuer
67
Rapid amortization provision
Require early principal amortization if specific events occur. Referred to as early amortization provisions and are included to safeguard the credit quality of the issue, particularly during the revolving period.
68
Risk ratings
based on the credit risk (not mkt risk) of the pool of securitized loans or receivables as well as the priority of how they absorb losses.
69
Solar ABS
The utility cost savings from switching to solar energy are expected to typically exceed the costs of investing in solar energy systems. Many solar ABS contain a pre-funding period, which allows the trust to acquire during a certain period of time after the close of the transaction additional qualifying transactions that meet certain eligibility criteria. Defaulting on a solar
loan is unlikely to reduce a consumer’s overall payment obligation as they need
to purchase energy in some form, and defaulting on a solar loan could revert
them to paying higher monthly energy expenses.
70
Solar ABS & Green covered bonds
Solar ABS have clear environmentally sustainable benefits through the installation of renewable energy and energy efficiency. The cover pool for green covered bonds are largely made up of mortgages to green buildings, identified through various green building certification standards.
71
Overcollateralization test
If Principal value of collateral falls below overcollateralization test trigger value, cash will be diverted away from equity and junior CLO debt tranches toward senior debt tranche investors. Each CLO debt tranche has its own targeted overcollateralization ratio. The overcollateralization ratios for each tranche act as covenants and, when tripped, redirect cash flows to purchase additional bank loan collateral or repay the senior-most CLO debt tranche.
72
Yield earned by CLO investors
Investors in senior or mezzanine bond classes typically earn a higher yield than comparable corporate bonds.
73
Prepayment risk
Contraction & Extension risk (Balloon risk - when borrower fails to make balloon payment at maturity of loan with balloon payment. A form of extension risk). TIme Tranching structure can redistribute prepayment risk across different tranche by creating bond classes that possess different
expected maturities. More senior a tranche, less exposure it has to prepayment & default risk.
74
Subordinating
waterfall structure, involves directing losses to the subordinated bond classes before the senior bond classes
75
Contractual maturity of MBS vs actual payments
Because both scheduled principal repayments and unscheduled prepayments are made over the life of an MBS, the contractual maturity for an MBS does not reveal its actual payments and prepayments. The weighted average life is a measure widely used to assess when an MBS can be expected to be paid off.
76
CMO
Securitize mortgage pass-through securities or multiple pools of loans and are structured to redistribute the cash flows to different bond classes or tranches, thereby creating securities that have different exposures to prepayment risk.
77
CMBS vs RMBS
Unlike RMBS, CMBS offer investors call protection at either the structural or individual loan level and thus trade more like corporate bonds than RMBS. However, commercial mortgages often include a large
balloon payment at maturity, making CMBS more vulnerable to a type of extension risk, balloon risk. CMBS mostly contain few CMs, so any default by one CMs can significantly impact the investors. RMBS, not CMBS, securitize conforming mortgages and are collateralized by homogeneous (single-family) residential properties. CMBS investors must evaluate the individual loans and properties backing a CMBS as well as the owners of the commercial properties themselves. CMBS - LTV & DSC (Net operating Income / Debt service). NOI = (Rental income − cash operating expenses) − replacement reserves. NOI excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization. Note that debt service is the annual amount of interest payments and principal repayments. CMBS has low contraction risk but high Extension risk. RMBS has both risk at high level. So CMBS has less prepayment risk than RMBS but has more concentration risk
78
Call protection
Structural call protection is achieved through sequential-pay tranches in the CMBS as a lower-rated tranche cannot be paid down until the higher-rated tranche is completely retired. Defeasance provides call protection at the individual loan level. Prepayment lockout provides call protection at the individual loan level.
79
Agency RMBS
Guaranteed by a federal agency or govt sponsored entity (GSE). Agency RMBS include securities issued by government
agencies. These RMBS carry the full faith and credit of the government, essentially a guarantee with respect to timely payment of interest and repayment of principal. RMBS issued by GSEs do not carry the full faith and credit of the government, but rather the GSEs’ guarantee of the timely payment of interest and principal for the securities. The GSE’s charge a fee for this guarantee. Due to changing regulatory guidance and increased scrutiny, non-agency-RMBS all but disappeared after the global financial crisis.
80
Non - Agency RMBS
MBS backed by residential mortgages that are issued by private entities and not guaranteed by a federal agency or a government-sponsored enterprise (GSE) are called “non-agency RMBS.” Typically use credit enhancements, such as insurance, letters of credit, guarantees, or subordinated interests, to mitigate the credit risk and improve the overall quality of the mortgage pool. These securities include
credit enhancements because they are not guaranteed or insured by a government
agency or by a GSE.
81
Z tranches (Residual tranches , Accretion bond or Accrual bond)
Z-tranches and residual tranches are created through time tranching, which means they do not pay interest payments
until a pre-set date. During the accrual period at each payment date, the principal value of the Z-tranche is credited by the
stated coupon rate. Typically, Z-tranches are the last tranche in a series of sequential or PAC and companion tranches. A Z-tranche benefits the other tranches because it frees up cash flows that other tranches can distribute. At the same time, holders of the Z-tranche do not face reinvestment risk when market yields decline. Z-tranches usually have average lives in excess of 20
years. This makes these tranches risky and hard to value.
82
Planned Amortization Class (PAC) tranches
Occasionally accompanied by support tranches. PAC tranches offer greater predictability and stability of the cash flows. These tranches make scheduled and fixed principal payments over a predetermined time period to their investors if the prepayment levels in the pool are within a certain maximum and minimum range. If the prepayment rate is within the specified range, all prepayment risk is absorbed by the support tranche.
83
Principal only securities
Pay only the principal repayments from the pool. These securities can be created either from mortgage pass-throughs or as a tranche in a CMO. Value of these securities is very sensitive to prepayment rates and interest rates. With falling interest rates or when prepayments accelerate, the value
of the PO will increase.
84
Interest-Only (IO) securities
IO securities are a companion of the PO securities in a CMO transaction. These securities have no face or par value. With increased prepayments, the cash flows paid to the IO investors decline. That is why
investors use IOs to hedge their portfolios against interest rate risk.
85
Floating-Rate tranches
The interest rates are variable and are often subject to both a cap and a floor rate. Floating-rate tranches can also be structured as inverse floaters, where the interest paid changes in the opposite
direction of the change in interest rates. They are used to hedge interest rate risk in portfolios.
86
Residual tranches
Collect any remaining cash flow from the pool after all the obligations to the other tranches are met. These investments are appropriate for investors that can assume the risk and hedge it. Such investors include
hedge funds and long-term institutional investors. Banks typically avoid such investments due to capital requirements.
87
Debt to Income ratio (Lower the better)
For residential lending. Compare an individual's monthly debt payment to their monthly pre-tax, gross income
88
Prime vs Subprime loans
Prime loans have borrowers of high credit quality with strong employment and credit histories, a low DTI, substantial equity in the underlying property, and a first lien on
the mortgaged property serving as the collateral for the loan. Subprime loans have
borrowers with lower credit quality, high DTI, and/or are loans with higher LTV, and
include loans that are secured by second liens otherwise subordinated to other loans.
89
Recourse vs Non recourse loan
the lender has a claim against the borrower for the shortfall (deficiency) between the amount of the outstanding mortgage balance and the proceeds received from the sale of the property. In a non-recourse loan, the lender does not have such a claim against the borrower and thus can look only to the property to recover the outstanding mortgage balance. If the mortgage is non-recourse, the borrower may have an incentive to strategically default on an underwater mortgage and allow the lender to foreclose on the property, even if the borrower has resources available to continue to make mortgage payments. Where mortgages are recourse loans, a strategic default is less likely because the lender can recover the shortfall from the borrower’s other assets and/or income
90
LTV > 100%
Underwater mortgage
91
Mortgage pass through security
Coupon rate is called pass through rate which is lower than weighted avg mortgage rate (weighting the mortgage rate of each mortgage in pool by % of outstanding mortgage balance relative to outstanding amt of all mortgages in pool). Weighted Avg maturity - weighting the remaining no of months to maturity by % of outstanding mortgage balance relative to outstanding amt of all mortgages in pool)
92
CMBS Structure specific provision
Call protection - Makes CMBS trading more like corporate bond than RMBS.
Structural call protection is achieved through sequential-pay tranches in the CMBS: A lower-rated tranche cannot be paid down until the higher-rated tranche is completely retired. Principal losses are always borne by the junior tranches first. Call protection on the individual loan level relies on three mechanisms, usually through covenants. The first is prepayment lockout, a contractual agreement that prohibits any prepayments during a specified period. Second, the loan agreement can also stipulate prepayment penalty points. Third, defeasance is a mechanism that allows prepayment, but the borrower must purchase a portfolio of government securities that fully replicates the cash flows of the remaining scheduled principal and interest payments, including the balloon loan balance, on the loan. When the last obligation is paid off, the value of the portfolio is zero (that is, no funds remain).
Balloon Maturity Provision - Unlike most
residential mortgages, which are self-amortizing, commercial real estate loans are not fully amortizing. Many commercial loans backing CMBS are balloon loans that require a substantial principal repayment at the maturity of the loan. There are several reasons why a borrower may fail to make the balloon payment at maturity. First, the borrower may not be able to refinance the existing mortgage to roll the balloon loan into a new loan due to the borrower’s deteriorating debt service coverage or LTV ratios. Lenders also may not be able to extend the terms of the existing loan given the economic environment. Finally, the borrower may not be able to sell the property to generate sufficient funds to pay off the outstanding principal balance. Balloon risk is the risk that the borrower fails to make the balloon payment at maturity and is in default. In this case, the lender may extend the loan over a period known as the “workout period,” and modify the original terms of the loan during the workout period. Because the life of the loan is extended by the lender during the workout period, balloon risk is a type of extension risk.
93
Ringfenced Loan
loan that is isolated from the issuer's other assets and liabilities. This isolation ensures that the loan is part of a separate pool of assets, known as the cover pool, which serves as collateral for the covered bond.
94
Why covered bonds carry lower yield than ABS
Eligibility criteria, Dynamic cover pool, Redemption regime (Rules and structure that govern how and when the bond principal is repaid to investors - Hard CB or Soft CB or Conditional pass through CB) in event of sponsor default
95
When a CLO transaction experiences a collateral pool default
call features embedded in bonds likely affect junior tranches
96
Credit vs Time tranching
Default will be first absorbed by subordinated class vs Payment will be first made to Senior debt & once it is fully paid next debt will receive payment
