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CFA Level I · CFA Level I Exam · Asset-Backed Security (ABS) Instrument and Market Features

A court finds that an originator kept effective control over receivables it transferred to an SPE and treats the transfer as a secured loan rather than a sale. The most likely consequence for ABS investors is that the:

Investors would most likely be exposed to the originator's credit risk because the receivables may be pulled back into the originator's bankruptcy estate. A recharacterized transfer is treated as a loan, not a true sale, so the assets are no longer isolated from the originator's creditors.

  1. Areceivables may be pulled into the originator's bankruptcy estate, exposing investors to the originator's credit riskCorrect
  2. Bcredit enhancement in the structure automatically increases to offset the recharacterization
  3. CSPE gains priority over the originator's secured lenders because of the transfer

Explanation

If the transfer is recharacterized as a financing, the assets stay part of the originator's estate. Investors then face the originator's bankruptcy process and credit risk, which defeats the purpose of the securitization. Credit enhancement does not adjust automatically, and the SPE does not gain priority.

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