CA Final · Advanced Financial Management · Securitization
Sunrise Finance Ltd. securitizes a pool of loans with a principal of Rs 50 crore. The SPV issues pass-through certificates of Rs 44 crore to investors. The balance is a subordinated tranche of Rs 6 crore retained by Sunrise as a credit enhancement. Pool losses are first absorbed by the retained tranche. If the actual pool loss is Rs 4 crore, what is the loss borne by the investors holding the Rs 44 crore certificates?
Investors bear no loss. The Rs 6 crore subordinated tranche retained by the originator absorbs the first losses, and the actual loss of Rs 4 crore is below that cushion. The senior certificate holders are therefore unaffected, with Rs 2 crore of the cushion remaining.
- ARs 4 crore
- BRs 2 crore
- CRs 0Correct
- DRs 0.5 crore
Explanation
Subordinated tranche of Rs 6 crore absorbs losses first. Loss of Rs 4 crore is less than Rs 6 crore, so it is fully absorbed, leaving Rs 2 crore of the cushion. Investors bear nil. Rs 4 crore would apply only if there were no credit enhancement.
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