Book 4_Fixed_READING 66_ASSET-BACKED-SECURITY-_ABS_-INSTRUMENT-AND-MARKET-FEATURES

Question 1

Covered bonds

Answer 1

• are similar to asset-backed securities, but instead of creating an SPE, the collateral (cover pool) remains on the balance sheet of the issuer
• Covered bonds give bondholders recourse to the issuer as well as the asset pool, which increases the bonds’ credit quality.

Question 2

Internal credit enhancements of ABS include

Answer 2

• Overcollateralization. The value of the collateral is greater than the face value of the ABS securities.
• Excess spread. Income from the collateral in excess of the payment obligations to ABS investors acts as a reserve to absorb default losses in the collateral pool.
• Credit tranching. Credit losses are first absorbed by the tranche with the lowest priority, and after that, by any other subordinated tranches, in order.

Question 3

Credit card ABSs

Answer 3

• are backed by credit card receivables, which are nonamortizing receivables
• a lockout/revolving period during which only interest and fees are passed through from the collateral pool to investors, while any principal payments on the receivables are used to purchase additional receivables. Following this period, the ABSs have an amortization period where principal payments are passed through to ABS investors.

Question 4

Solar ABSs

Answer 4

• Are backed by loans to homeowners to finance installation of domestic solar energy equipment.
• solar loans can be secured on the solar energy equipment or the homeowner’s residence.
• solar ABSs may be attractive to ESG investors.

Question 5

Collateralized debt obligations (CDOs)

Answer 5

• Are structured securities backed by a pool of debt obligations that are managed by a collateral manager.
• CDOs include collateralized bond obligations (CBOs) backed by corporate and emerging market debt, and collateralized loan obligations (CLOs) backed by leveraged bank loans.

Question 6

Leveraged loans

Answer 6

are senior secured bank loans made to companies that have high levels of debt already, or have a poor credit history.

Question 7

Three major types of CLO

Answer 7

• 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. Collateral pool exposure is generated through credit derivative contracts

Question 8

Covered bonds may have different provisions in case their issuer defaults

Answer 8

• A hardbullet covered bond: Defaut if missing payment
• A soft-bullet covered bond: Postpone
• A conditional pass-through covered bond converts to a pass-through bond