CFA Level I · CFA Level I Exam · Fixed-Income Securitization
A bank transfers a pool of auto loans to a special purpose entity that issues bonds backed by the loans. The legal feature of this structure that most likely allows the bonds to be rated higher than the bank's own debt is that:
The bonds can be rated higher than the bank because the loans are legally isolated from the bank's bankruptcy risk through a true sale to the SPE. Investors then depend on the collateral and credit enhancement rather than on the bank's own credit quality, which supports a higher rating.
- Athe loans are legally isolated from the bank's bankruptcy riskCorrect
- Bthe bank guarantees all bond payments unconditionally
- Cthe bonds are issued with a single maturity date
Explanation
The true sale to the SPE legally separates the loans from the originator, so the bond credit quality rests on the collateral and structure rather than on the bank's creditworthiness. An unconditional bank guarantee would tie the rating to the bank. Maturity structure does not drive the rating difference.
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