Question: A corporation is considering a securitization and is considering two possible credit enhancement structures backed by a pool of automobile loans. Total principal value underlying the asset-backed security is $300 million.
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Principal Value for:
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Structure I
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Structure II
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Pool of automobile loans
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$304 million
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$301 million
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Senior class
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$250 million
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$270 million
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Subordinated class
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$50 million
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$30 million
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(a) Which structure would receive a higher credit rating and why?
(b) What forms of credit enhancement are being used in both structures?