CA Final · Advanced Financial Management · Securitization
An SPV acquires a pool of vehicle loans of Rs 200 crore. The rating agency estimates the expected loss at 3% of the pool and requires credit enhancement equal to 2.5 times the expected loss, provided through a subordinated tranche. What is the size of the senior tranche sold to investors?
The senior tranche is Rs 185 crore. Expected loss is 3% of Rs 200 crore, which is Rs 6 crore. Credit enhancement at 2.5 times is Rs 15 crore in the subordinated tranche. The remaining Rs 185 crore is sold as senior. Deducting only the expected loss would give Rs 194 crore, which is wrong.
- ARs 194 crore
- BRs 185 croreCorrect
- CRs 15 crore
- DRs 190 crore
Explanation
Expected loss = 3% x 200 = Rs 6 crore. Required enhancement = 2.5 x 6 = Rs 15 crore. Senior tranche = 200 - 15 = Rs 185 crore. Rs 194 crore deducts only the expected loss and ignores the 2.5x multiple.
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