ABS / CLO Model

This ABS/CLO model is built around a collateral pool of leveraged loans that generates cash in three ways: interest on the performing balance at a weighted average coupon, principal from scheduled amortisation and prepayments, and recoveries on defaulted loans that arrive with a lag.

• The pool roll-forward applies annual prepayment and default rates to an opening balance, adds reinvestment while the deal is still in its reinvestment period, and produces a closing performing balance that drives the next period. Defaulted loans stop accruing interest, so weak credit immediately suppresses income rather than only affecting principal.
• Reinvestment, default, prepayment, recovery and coupon assumptions are all named inputs, which makes stress testing specific credit and prepayment views straightforward.

Once period cash is available, the waterfall applies fees first, then steps through tranches in rating order, running overcollateralisation and interest coverage tests at successive levels. Each test compares available collateral or interest against the tranches it protects, and a breach diverts everything remaining in the waterfall into turbo amortisation of the most senior outstanding tranche.

• That cure continues until the breached test passes again, which means junior noteholders lose interest and equity receives nothing during a cure. Principal follows a separate rule: reinvested while the deal is inside its reinvestment period, then paid sequentially from the top of the capital structure down.
• Because the whole pass is computed in one sequential sheet, waterfall payments and tranche balances stay internally consistent.

Every rated tranche is tracked with an opening balance, interest paid, principal paid, closing balance and weighted average life, allowing a reviewer to see how each layer of the capital structure behaves as collateral seasons.

• Equity is treated differently: its notional remains constant, distributions accumulate separately, and cash-on-cash and internal rate of return are derived from the distribution stream.
• The manager's incentive fee is calculated on equity distributions above a cumulative hurdle that grows with the equity notional each year, so the fee only appears once a defined excess is generated rather than reducing equity from the first period.
• Together these outputs describe protective and return dynamics rather than individual deal results.

The model is organised with an assumptions area, a collateral cash flow sheet, a combined waterfall sheet, a returns summary and a checks sheet covering ten integrity tests.

• A single waterfall pass avoids the circularity between payments and balances, and the checks confirm that cash is conserved, balances tie out, tranche balances never turn negative and no tranche is overpaid.
• The assumption layout is positioned to support sensitivity work on default rate, prepayment rate, recovery, coupon compression and reinvestment period length, though these are not shipped as scenario toggles.
• A practical reading is to focus on how defaults, coverage breaches and reinvestment decisions interact, since those relationships drive tranche outcomes more than any single input.