Session 16 — ABS: Student Loans → Credit Cards → Other ABS (Plain English + Mini-Game)

Session snapshot — ABS in 90 seconds ⏱️

What is ABS? (plain English)

ABS = Asset-Backed Securities — bonds paid by cash flows from a pool of loans/receivables.
Loans go into a Trust (SPV); the trust issues bonds in tranches (AAA senior down to equity).
Examples: 🎓 student-loan ABS, 💳 credit-card ABS, 🚗 auto-loan ABS, ☀️ solar-loan ABS, 🍕 whole-business, etc.

Ratings 101 🏷️

Senior tranches: often AAA/AA (credit enhancement: subordination, OC, reserves, triggers).
Mezzanine: typically A/BBB with more risk/return.
Equity/residual: usually unrated, highest risk/return; often retained by sponsor.

Who buys ABS? 🛒

AAA short (money-market style): money-market funds, bank treasuries, securities lenders.
AAA/AA 2–5y: insurers, asset managers, pensions, bank portfolios.
A/BBB mezz: structured-credit/ABS funds; some insurers/AMs with risk budgets.
Equity/residual: hedge funds/specialists; sponsors often retain to align incentives.

Generalized mix; buyer base varies by shelf, tenor, and market tone.

Where do they trade? 🧭

Primary: new issues sold via dealers (often Rule 144A/Reg D).
Secondary: OTC (dealer-to-client), not listed on stock exchanges.
Some bond ETFs/funds hold ABS; individual bonds trade OTC.

“Safe?” ✅⚠️❌

✅ Safer: Prime, senior AAA in well-established shelves (cards/auto) with strong triggers.
⚠️ Watch: Mezzanine, non-prime shelves, longer tenors; performance depends on excess spread & servicing.
❌ Risky: Equity/residual; thinly capitalized originators; liquidity risk in stress.

“Worth anything?” 💵 (why investors buy)

Yield pick-up vs Treasuries/corporates for similar duration.
Cash-flow shape: amortizing bonds can match liabilities.
Diversification: consumer/operating-asset risk vs corporate balance sheets.

Classroom overview only — not investment advice.

🎒 Student-loan securitization — cash-flow map

Scenario: Show “repo” financing

Cash to borrower/investors Financing/“repo” cash Missed/at-risk cash

Tranche waterfall — AAA vs Mezzanine vs Equity (animated 🍷)

Preset: Senior / Mezz / Equity

Mode: Cash fills Senior first, then spills to Mezz, then Equity.

💵 Cash into trust (% of stack): 60%

Senior (AAA) 90%

Mezzanine 8%

Equity / Residual 2%

How to read this:

Cash mode: Blue liquid starts at the top and pays Senior first. Only after Senior is full does it “spill” to Mezz, then Equity.
Loss mode: Red liquid rises from the bottom. Equity absorbs first losses, then Mezz, then Senior.
Preset controls the size of each tier (subordination/OC). These are simple classroom examples.

Outcome: —

Plain English:

Bank makes the student loan. The student gets cash for school and promises to pay monthly after graduation.
Bank sells the loan to a sponsor. The bank gets cash back; the sponsor now owns the loan.
Sponsor puts many loans into a Trust (SPV) and sells bonds to investors. The Trust uses investor money to pay the sponsor.
Each month the student pays the servicer → Trust → investors. That’s the “pass-through.”

If the student doesn’t pay, does all money to investors stop? No. Payments from that borrower stop, but other borrowers still pay. Buffers (reserves, excess spread, junior pieces) absorb losses before seniors are hit. If the sponsor used short-term “repo,” margin calls can happen when collateral drops.

One-line caption: “A bank makes a student loan, sells it to a sponsor that bundles many loans into a Trust and sells bonds to investors; monthly payments flow from students to investors, with buffers shielding seniors from first losses.”

Part I 🎓 Student Loans (SLABS) — main example

Video: How Wall Street Profits From Student Loans (YouTube)

Size & structure (order-of-magnitude, 2024–2025):

U.S. student loans ≈ $1.7T outstanding (mostly federal loans).
Private student loans ≈ $130–140B.
Private loans can be pooled into SLABS (Student-Loan ABS) and sold to investors.

Investor view — quick notes

💡 Buy/not? Senior SLABS from established lenders can be high-quality; liquidity thinner than cards/auto.
🏷️ Ratings: seniors often AAA/AA; mezzanine A/BBB; residual unrated. Always read the presale.
🧰 CDS/CDO: niche; post-GFC ABS-CDO is tiny. Hedges usually via sponsor’s corporate CDS or rates.
🧯 Systemic? Private SLABS are a small slice; main risks are borrower/servicing, not 2008-style systemic.

Part II 💳 Credit-Card ABS — quick notes

Receivables: revolving balances (interest/fees) from card accounts.
Structure: bank sponsors a master trust; many series over time.
Cash flow: finance-charge & principal collections; early-amortization triggers protect investors.
Key metrics: MPR, gross yield, charge-offs, delinquencies, excess spread.

Size & main players (order-of-magnitude, recent):

Outstanding: ≈ $80–90B; annual issuance: ≈ $15–25B.
Issuers (examples): JPMorgan/CHAIT, Citibank/CCIT, Capital One/COMET-CCART, American Express/AMXCA, Discover/DFS.

Figures fluctuate—add date/source on slides.

Video: How credit cards become asset-backed bonds (YouTube)

Instructor comments — investor view (Credit-card ABS)

💡 Buy/not? Prime card seniors historically resilient/IG; mezzanine is cycle-sensitive.
🏷️ Ratings: seniors typically AAA/AA; mezz down to BBB.
🧰 CDS/CDO: no liquid consumer-ABS CDS index; hedges via CDX IG/Financials (sponsor) or cash selection.
📈 Watch: charge-offs & MPR in monthly servicer data.

Part III 🧰 Other ABS — quick map (no MBS, no SLABS)

🚗 Auto loans (prime & non-prime): outstanding ≈ $250–300B; issuance ≈ low-$100Bs. Ford Credit, GM Financial, Ally, Toyota, Hyundai/Kia, Santander.
🚙 Auto leases: issuance ≈ $30–35B/yr. BMW, Mercedes-Benz, Toyota (TMCC), Honda (HAFS), Nissan (NILT), Ford (FCALT).
🏪 Dealer floorplan: multi-$B programs. Ford, GM, Ally, Toyota, Nissan.
🛠️ Equipment loans/leases: low-tens of $B/yr. DLL, PEAC, GreatAmerica, Ascentium/Regions.
🏖️ Timeshare: ≈ $3–5B/yr. Hilton Grand Vacations, Travel+Leisure (Wyndham), Marriott Vacations.
🚘 Rental-car fleets: multi-$B programs. Avis AESOP, Hertz HVF, Enterprise.
✈️ Aircraft leases: ≈ high-single-$B/yr. AerCap, Avolon, SMBC Aviation, Carlyle Aviation, Castlelake.
📦 Container leases: ≈ ~$1B+/yr. Triton, Textainer, Seaco, SeaCube.
🍕 Whole-business (WBS): several $B/yr. Domino’s, Dunkin’, Taco Bell/Yum!, Planet Fitness.
☀️ Residential solar-loan ABS: ≈ $4–6B/yr. GoodLeap, Sunrun, Mosaic, SunPower, Dividend.
🏠 PACE: ≈ ~$1–2B/yr. R-PACE shelves; sponsors vary by state.
💳 Consumer/marketplace loans: double-digit $B/yr. LendingClub, SoFi, Upstart, Marlette, Avant, OneMain.
📄 Trade receivables / conduits (often ABCP): large but mostly private. JPM, Citi, BofA, MUFG/SMBC conduits.

All sizes are order-of-magnitude; add date + source when appropriate.

📰 Auto-ABS — What’s in the news (2024–2025)?

📊 Non-prime stress up: rising net losses & 60+ day delinquencies in non-prime through 2025; prime weaker too but far lower.
⚠️ Idiosyncratic blow-ups: a notable subprime auto lender failure in 2025 hit its ABS; viewed as idiosyncratic, not systemic.
🚗 Macro: late car-payment rates for subprime set highs in early 2025; rates/insurance costs are pressure points.
🔎 Takeaway: senior prime still IG-like (IG = investment grade); subprime mezz most cycle-sensitive. Always check monthly servicer data.

Homework — Would you recommend Student-Loan ABS to your parents?

Assume they want steady returns. Consider private student-loan ABS (not federal loans). Answer: “Would you recommend an investment in SLABS?” Support your view with structure, ratings, liquidity, risks, and what you’d monitor. Base case: borrowers repay as expected. Stress case: higher delinquencies/charge-offs.

Your memo (150–300 words recommended)

0 words (target 150–300)

Classroom exercise only — not investment advice.

🎯 Mini-Game — “Guess the Biggest”

Pick the biggest/leading recent player (2024–2025) for each ABS type. One try per question. 🏆

Category Question text

Q 0 of 0 Score: 0/0

🧪 Session 16 — Quiz (20 T/F)

Ready to check your understanding of SLABS, credit-card ABS, auto ABS, and the senior ➜ mezzanine ➜ equity waterfall?

Open Session 16 Quiz