Quick question. Company is considering a pool of credit enhancement structures backed by pool of auto loans. Total principal value of the ABS is $300 Mil.
Structure 1: Pool Value - $304 Million, senior class $250 million, subordinate class $50 million
Structure 2: Pool Value - $301 Million, senior class $270 million, subordinate class $30 million
Both structures involve overcollateralization and senior-subordinate structure, but which gets the higher credit rating and why?
I'm fairly certain its the first one gets the higher credit rating because it has higher overcollateralization and consequently less cash flow risk, and also because there is more "defense" from the subordinate class of $50 million. Only contention I have is that you're going to eventually have to pay higher yield to that larger $50 mil subordinate class (discounting shifting interest rate mechanism). Can anybody confirm if I am correct? Thanks.
S&P and Moody's screwed up and are now overly cautious. They ammended their ratings models by making OC have to be double the levels it used to be. I'm with you...the top structure gets better ratings.
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