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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 position of the PTC investors?

PTC investors receive pro-rata collections from the underlying pool of receivables, so they bear the pool's prepayment and default risk. Their claim is on the SPV's assets, not on the originator, and there is no guaranteed fixed coupon independent of collections.

  1. AThey hold a fixed-maturity debt claim against the originator's balance sheet
  2. BThey receive pro-rata collections from the pool, so they bear the pool's prepayment and default riskCorrect
  3. CThey are guaranteed a fixed coupon by the SPV irrespective of collections
  4. DThey hold equity in the originator and share in its profits

Explanation

In a pass-through structure the SPV passes principal and interest collected from the pool to investors in proportion to their holdings. Investors therefore bear prepayment and credit risk of the pool. A fixed guaranteed coupon or a claim on the originator would defeat the true-sale and bankruptcy-remote nature of the structure.

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