In CFA Volumn 5, page 236, foot note, it states: “The buyers of the asset-backed securities will be converned that the assets were purchased at less than fair market value, thereby weakening their credit position”. Is this statement right? W What wouldn’t buyers of ABS want SPV to acquire assets on the cheap?
Well, in full disclosure I’m only on the second reading of ethics and without knowing in what context this statement was issued I’m really guessing, but here goes nothing: Almost always (I only say “almost” because it’s hard to prove a negative, but I’ve never seen it) in an SPV or any structured credit conduit there’s a limit (written into the indenture) as to how cheap an asset can be bought for (for instance in our high-grade deals we can’t buy anything that’s cheaper than 85 cents on the dollar). This language is put in there to stop speculating - it’s not a hedge fund, it’s an SPV or ABCP or some other such vehicle that is supposed (intended) to hold high-quality assets with little to no chance of default. Clearly if you’re buying AAA paper at 20 cents on the dollar it’d be a stretch to call it “high quality”, and although possibly a great money-maker, it’s not what the SPV was designed for.
In that case, I guess it makes sense. But how would that affect investors of that ABS?
It’s there to protect the investors from a maverick manager - it’s not designed to be a total return vehicle, it’s designed to be a safe, steady stream of interest payments.