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CMA Final · Strategic Financial Management · Securitization

An SPV acquires a pool of auto loans with an outstanding principal of Rs 50 crore and issues pass-through certificates. The pool's loans carry a weighted average interest of 12% p.a. The SPV pays investors 10% p.a. on the principal outstanding and pays the servicer a fee of 0.5% p.a. on the same principal. Ignoring defaults and prepayments, the annual excess spread retained in the structure is:

Excess spread is pool interest less investor interest less servicing fee. That is 12% minus 10% minus 0.5%, or 1.5% of Rs 50 crore, giving Rs 0.75 crore. Ignoring the servicer fee would wrongly give Rs 1.00 crore.

  1. ARs 0.75 croreCorrect
  2. BRs 1.00 crore
  3. CRs 1.25 crore
  4. DRs 0.25 crore

Explanation

Interest inflow = 12% of 50 = Rs 6.00 crore. Investor payout = 10% of 50 = Rs 5.00 crore. Servicer fee = 0.5% of 50 = Rs 0.25 crore. Excess spread = 6.00 - 5.00 - 0.25 = Rs 0.75 crore. Rs 1.00 crore ignores the servicer fee.

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