Sunshine Finance, a non-ADI finance company, securitises $500,000 personal loans; as a result, an SPV issues $100,000

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Question:

Sunshine Finance, a non-ADI finance company, securitises $500,000 personal loans; as a result, an SPV issues $100,000 AAA-rated bonds and $400,000 B-rated bonds. Sunshine Finance invests in the whole B tranche while BigSuper, a superannuation fund, invests in the whole AAA tranche.

a) Show the impact of the securitisation above on the SPV's balance sheet. [You need to draw the balance sheet] No explanation is required.

b) Explain in which order the SPV will pay the coupons of the bonds and which tranche is likely to have a higher coupon rate.

c) Show the impact of the securitisation above on Sunshine Finance's balance sheet. [You need to draw the balance sheet]. No explanation is required.

d) Discuss whether the securitisation above has provided funds to Sunshine Finance, and whether securitisation has improved the quality of its assets, by decreasing the credit risk.

e) Consider that North Bank, an ADI, securitises $500,000 personal loans; as a result, an SPV issues $100,000 AAA-rated bonds and $400,000 B-rated bonds. North Bank invests in the whole B tranche while BigSuper, a superannuation fund, invests in the whole AAA tranche. BigSuper has a bank account at North Bank while the SPV has their bank account at East Bank, another Australian Bank. Draw the diagram of flow of funds associated with this securitisation. [Include all financial instruments, primary and/or secondary financial markets where relevant, players and their status, different types of money involved, creation and destruction of money and financial instruments where relevant] No explanation is required.

f) Discuss whether the securitisation described in e) has provided funds to North Bank, and whether securitisation has improved the quality of its assets