Lesson 4 of 5 · All lessons in this module
Lesson 4 of 5 · 12 min
The SPE: true sale and bankruptcy remoteness
Because the SPE legally owns the assets and is untouched by the originator's bankruptcy, ABS investors carry only the credit risk of the underlying borrowers.
In short
- The SPE is bankruptcy-remote: if the originator fails, its creditors have no claim on the assets in the SPE.
- A true sale irrevocably and fully transfers the lender's rights to the SPE; the assets are de-recognized from the seller's balance sheet.
- ABS investors' only credit risk is that the pool's borrowers default; the originator's own credit quality is no longer directly relevant.
- Seniority does not apply between the originator's bonds and the SPE's ABS: they are claims on two different entities.
- Legal protection depends on the jurisdiction: transfers can be challenged as fraudulent conveyances, and trust law is weaker in some countries.
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