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CMA Final · Strategic Financial Management · Securitization

An SPV buys a Rs 100 crore receivables pool and issues Senior tranche of Rs 70 crore, Mezzanine of Rs 20 crore and an unrated Equity (first loss) piece of Rs 10 crore. Pool losses over the life are Rs 14 crore, allocated by strict seniority of subordination. What is the loss borne by the Mezzanine tranche, and what is the credit enhancement (as % of pool) available to the Senior tranche before any loss?

Mezzanine bears Rs 4 crore and the Senior tranche has 30% credit enhancement. The equity piece absorbs the first Rs 10 crore of the Rs 14 crore loss, leaving Rs 4 crore for mezzanine, while Rs 30 crore of subordinated tranches sits below Senior in a Rs 100 crore pool.

  1. ARs 4 crore; 30%Correct
  2. BRs 4 crore; 10%
  3. CRs 14 crore; 30%
  4. DRs 10 crore; 20%

Explanation

Equity absorbs the first Rs 10 crore, leaving Rs 4 crore for Mezzanine; Senior is untouched. Subordination below Senior is 20 + 10 = Rs 30 crore, i.e. 30% of Rs 100 crore. The 10% option counts only the equity piece and ignores the mezzanine cushion.

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