Lesson 3 of 7 · All lessons in this module
- Covered bonds: dual recourse and a dynamic pool
- Credit enhancement: OC, excess spread and tranchingVideo lesson
- Integrated cases: who is paid, and when, in a tranched ABS
- Amortizing vs non-amortizing collateral: credit card ABS
- Solar ABS
- CDOs: managed pools and leveraged equity
- CLOs: capital structure, tests and the manager
Lesson 3 of 7 · 17 min
Integrated cases: who is paid, and when, in a tranched ABS
In a senior/subordinated ABS, defaults first cut the cash the pool can pay, and the cut lands on the residual and then the most junior notes; separately, the order of principal repayment decides which class feels a slowdown or a surge in borrower payments.
In short
- Interest waterfall: cash collected = (performing balance) × (pool coupon). It pays class A's coupon first, then B, then C, and whatever remains goes to the residual class.
- Defaults do not reduce the notes' coupons; they reduce cash. The first loss shows up as a smaller residual, then as an interest shortfall on the most junior note, and only later on senior notes.
- An investor's receipt = holding ÷ class par × interest paid to the class. Read the holding in the exhibit before you read the table.
- Principal waterfall (sequential pay): every unit of principal collected goes to class A until it is repaid, then B, then C. That fixes each class's expected repayment year.
- A slowdown only affects classes still outstanding in that year, and the most junior of those feels it first and most. A surge in prepayments shortens the classes it reaches.
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