Explanation:
Statement (c) is false. Tranching is heavily driven by investor demand, not just issuers. Different investors have different risk appetites, regulatory constraints, and return targets. For example, many institutional investors require highly rated (e.g., AAA) securities, which tranching creates out of lower-rated underlying pools. The other statements accurately describe motivations and characteristics of securitization structures.
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315.3. In regard to the motivations of issuers or investors in a securitization, according to Malz,¹⁷ each of the following is true EXCEPT, which is not?
A
Securitizations undertaken primarily to capture the spread between the underlying loan interest and the coupon rates of the liabilities are sometimes called arbitrage CDOs, while securitizations motivated largely for balance sheet relief are termed balance-sheet CDOs
B
An important motive of the issuer for securitization is that it provides technology for maturity matching, i.e., for providing term funding for the underlying loans
C
Tranching technology is primarily motivated by issuers; investors do not require it
D
Mezzanine tranches have less of a natural investor base than other securitized credit products because they may behave like a senior tranche (i.e., low probability of loss but high systematic risk), or they may behave more like an equity tranche (i.e., high probability of impairment)
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