Credit Portfolio CDO Model

The model revolves around a static portfolio of corporate credit assets, typically $500 million in par value, as targeted in this template. Portfolio performance is driven by the weighted average coupon, which for leveraged loans equals a base rate (SOFR) plus a spread, and for high-yield bonds a fixed rate.

• Defaults reduce performing par over time, with recovery rates applied to gross defaults to determine net losses. The capital structure is tranched: senior AAA notes (60–65% of capital), mezzanine tranches at progressively higher spreads, and an equity layer (8–12%) that absorbs first losses but receives residual cash flows.
• These drivers feed directly into interest income and interest expense calculations.

The model follows a sequential, non-circular flow. Interest income is computed on opening performing par using a base rate plus weighted average spread for collateral.

• Defaults and recoveries roll forward the performing par schedule, adjusting for reinvestment during the reinvestment period (years 1–5) or principal paydowns thereafter. Interest due on each tranche is calculated on opening balances at the applicable base rate plus tranche spread.
• The waterfall then distributes available interest: trustee and admin fees, senior interest, senior OC/IC tests, mezzanine interest in order of seniority, subordinated management fees, and finally equity residual. Principal proceeds follow a separate waterfall after reinvestment, paying down notes from senior to equity.

Overcollateralisation and interest coverage ratios are tested per period, triggering diversion of excess spread to senior note paydown if thresholds are breached.

The model generates period-by-period cash flows for each tranche, including interest payments, principal paydowns, and equity distributions. Key outputs include the equity IRR and MOIC, computed from the equity cash flow stream with an initial negative investment and positive periodic distributions.

• Overcollateralisation (performing par divided by notes outstanding at or above each tranche) and interest coverage (interest income divided by tranche interest due) are reported per tranche to monitor structural health. Validation checks ensure waterfall integrity, non-negative tranche balances, and sanity bounds for IRR (0–30%) and MOIC (0–5x).
• These outputs help assess whether the structure can withstand stress scenarios and deliver the target equity return.

This template is built for evaluating CDO structuring and investment decisions. Users can vary assumptions such as default rates, recovery rates, base rate levels, and tranche spreads to see how each tranche’s risk-return profile changes.

• The model explicitly handles stress scenarios by incorporating OC/IC test triggers that divert cash flows to senior notes when thresholds are breached, simulating realistic protective mechanisms. It also distinguishes between reinvestment and amortisation periods, ensuring that principal proceeds are recycled or used to pay down notes appropriately.
• The checks sheet flags common pitfalls like negative equity distributions or misordered waterfalls, making the model a practical tool for assessing whether a proposed CDO structure meets return targets under varying credit conditions.