A special purpose vehicle buys the receivables and issues notes against them. Cash flows run down a waterfall: the senior tranche is paid first and the equity tranche absorbs the first losses, which lets a pool of mid-quality loans support a AAA rated senior note.
The structure is only as good as its credit enhancement: subordination, overcollateralisation, excess spread and reserve accounts. Analysis is about loss curves and payment rates on the collateral, not about a single borrower's balance sheet.
Example: a $1 billion auto pool issues $850 million of AAA notes, $90 million of subordinate notes and $60 million of equity, plus 2% excess spread. Cumulative collateral losses would have to exceed 15% before the senior note takes a dollar of loss.
Related: clo, mortgage-backed-security, seniority, credit-rating, recovery-rate