CMA Final · Strategic Financial Management · Securitization
A pool of auto loans has a face value of Rs 100 crore. The SPV issues Senior tranche Rs 80 crore, Mezzanine Rs 12 crore and an equity (first loss) piece of Rs 8 crore. Pool losses are Rs 15 crore, absorbed in reverse order of seniority. What loss is borne by the Mezzanine tranche?
The Mezzanine tranche bears Rs 7 crore. The equity piece absorbs the first Rs 8 crore of the Rs 15 crore loss, and the remaining Rs 7 crore falls on the Mezzanine, which can absorb up to Rs 12 crore, leaving the Senior tranche unaffected.
- ARs 7 croreCorrect
- BRs 12 crore
- CRs 15 crore
- DRs 3 crore
Explanation
Losses hit equity first: Rs 8 crore wiped out. The remaining loss is 15 - 8 = Rs 7 crore, which is absorbed by the Mezzanine (capacity Rs 12 crore). Senior is untouched. Rs 12 crore would wrongly assume the whole mezzanine is lost.
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