Key takeaways:
- Post-GFC reforms have made ABS structures significantly more resilient and transparent. These changes have contributed to zero investment-grade ABS defaults since 2010 and have created a more robust, standardized market framework.
- Multiple layers of credit enhancement work together to help protect investors – even in stressed environments. Key mechanisms absorb losses long before senior tranches are threatened, while deals naturally de-lever over time, increasing credit enhancement as principal amortizes.
- Recent rating agency actions highlight the effectiveness of these protections. In 2025, both Moody’s and KBRA issued multiple ABS upgrades across auto loan
transactions, citing increased credit enhancement. Even amid rising delinquencies in some sectors, structural protections proved sufficient to support stronger ratings and demonstrate the durability of modern ABS structures.
ABS have historically weathered crises with lower default rates and shallower drawdowns than corporate bonds, making them a potentially attractive relative value play. Such resilience is not accidental; it stems from a disciplined framework that evaluates collateral quality and embeds multiple layers of credit enhancement, which can vary depending on the underlying collateral.
In an ABS transaction, sponsors transfer the underlying loans or receivables to a special purpose vehicle (SPV) that passes along the cash flows generated by the collateral to investors. The legal structure prioritizes ABS investor claims over other creditors and is bankruptcy-remote from the sponsor.
While credit enhancements may serve as safeguards against potential losses, it’s important to understand that issuers and rating agencies assess the credit risk of the underlying asset pool before an ABS transaction is even structured.
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IMPORTANT INFORMATION
Actively managed portfolios may fail to produce the intended results. No investment strategy can ensure a profit or eliminate the risk of loss. Index performance does not reflect the expenses of managing a portfolio as an index is unmanaged and not available for direct investment.
Asset-backed securities (ABS) are financial investments backed by a pool of income-generating assets like loans, leases, or credit card balances.
Concentrated investments in a single sector, industry or region will be more susceptible to factors affecting that group and may be more volatile than less concentrated investments or the market as a whole.
Diversification is a common investment strategy that entails buying different types of investments to reduce the risk of market volatility.
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
Securitized products such as mortgage- and asset-backed securities, are more sensitive to interest rate changes, have extension and prepayment risk, and are subject to more credit, valuation and liquidity risk than other fixed-income securities.
Definitions
The Bloomberg U.S. Aggregate Asset-Backed Securities (ABS) Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market. The index only includes ABS securities.
A credit spread is the difference in yield between two debt securities with different credit quality but the same maturity.
Credit quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). The S&P 500 Index or Standard & Poor’s 500 Index is a market-capitalization weighted index of 500 leading publicly traded companies in the U.S.
Investment-grade securities: A security typically issued by governments or companies perceived to have a relatively low risk of defaulting on their payments. The higher quality of these bonds is reflected in their higher credit ratings when compared with bonds thought to have a higher risk of default, such as high -yield bonds.
Loss given default (LGD) is the amount of money that a bank or other financial institution is projected to lose when a borrower defaults on a loan.
Probability of default (PD) is the probability of a borrower or debtor defaulting on loan repayments. Within financial markets, an asset’s probability of default is the probability that the asset yields no return to its holder over its lifetime and the asset price goes to zero. Investors use the probability of default to calculate the expected loss from an investment.
A Special Purpose Vehicle (SPV), also known as a Special Purpose Entity (SPE), is a separate subsidiary formed by a parent company to isolate and manage financial risks. By operating independently, SPVs secure obligations even in the event of a parent company’s bankruptcy.
Tranche: In securitized products, a tranche is one of a number of related securities offered as part of the same transaction, with each representing a different degree of risk and carrying a commensurate credit rating.
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Any reference to individual companies is purely for the purpose of illustration and should not be construed as a recommendation to buy or sell or advice in relation to investment, legal or tax matters.