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CMA Final · Strategic Financial Management · Securitization

In a pass-through securitisation, an originator transfers a pool of auto loans to a Special Purpose Vehicle (SPV), which issues pass-through certificates (PTCs) to investors. Which statement best describes the key feature that makes the structure bankruptcy-remote for investors?

The structure is bankruptcy-remote because the receivables are legally sold to the SPV in a true sale. Hence they are isolated from the originator's estate, and the originator's creditors cannot claim them if the originator becomes insolvent.

  1. AThe pool is legally sold to the SPV, so the originator's creditors cannot claim the assets on the originator's insolvencyCorrect
  2. BThe originator guarantees every instalment of the pool to the investors
  3. CThe SPV is a subsidiary that consolidates the pool back onto the originator's balance sheet
  4. DThe investors hold a floating charge over all assets of the originator

Explanation

Bankruptcy remoteness arises from a true sale of the receivables to the SPV, which isolates them from the originator's creditors. A full guarantee by the originator would defeat the true sale, and a floating charge over originator assets is not how securitisation works.

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