Modeling CLO Cash Flow Waterfalls

When To Use

• Building or auditing a CLO waterfall model from an indenture or offering circular
• Projecting tranche-level returns under base, stress, and recovery scenarios
• Analyzing overcollateralization (OC) and interest coverage (IC) test triggers and cure mechanics
• Evaluating reinvestment period behavior including par-building trades and discretionary trading
• Comparing equity distributions across deal vintages or managers

Inputs To Gather

• Capital structure: Tranche names, ratings, par amounts, spreads/coupons, payment frequency, and stated maturity vs. legal final
• Collateral pool: Par balance, WAS (weighted average spread), WAC (weighted average coupon), WARF (weighted average rating factor), WAL, diversity score, and CCC bucket concentration
• Coverage test triggers: OC and IC trigger levels and cure thresholds for each tranche (typically Class A/B OC, Class A/B IC, etc.)
• Reinvestment criteria: Reinvestment period end date, reinvestment target par, concentration limits, collateral quality tests (minimum WAS, maximum WARF, minimum diversity, CCC cap)
• Default and recovery assumptions: CDR (constant default rate), CPR (constant prepayment rate), recovery rate, and recovery lag in months
• Fee structure: Senior management fee (bps), subordinate management fee (bps), trustee/admin fees, and incentive management fee waterfall position
• Payment dates and day count: Quarterly vs. semi-annual, Act/360 vs. 30/360 [VERIFY against indenture]