CLO classes

A leveraged loan pool paying the forward plus its spread, a reinvestment period, then sequential principal; interest pays each class in order, and failing overcollateralization (par) or interest coverage tests divert cash to the senior notes. Defaults at a constant rate or simulated with a one-factor Vasicek model, with each class's price, discount margin, average life, expected loss and test failure probabilities, and the equity's residual.

Inputs

Rated classes, senior firstOne per line: name, balance, spread, then the OC and IC triggers (optional). The equity is the collateral less the notes.

Class held

Collateral par

Loan spread (WAS)%

Senior fees%

Reinvestment endsLoans mature (WAM)Legal finalDefaults

Mean default rate a year%

Asset correlation

Paths

Recovery%

Prepayment (CPR)%

Value atCurrencyCurve

Curve: flat rate% cc

Results

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Methodology

Conventions

Quarterly: interest collected on the performing par (forward plus the loans' spread, less senior fees) pays each class's coupon in order.
A failing OC (par) or IC test at a class diverts the interest left to pay down the classes above it until it passes.
Principal is reinvested at par during the reinvestment period, then pays the classes sequentially; the equity takes what is left.
Defaults: a constant rate, or one-factor Vasicek with one common factor a year. Each class is discounted at its discount margin.

References

Moody's, Global Approach to Rating CLOs
Vasicek (2002)

Formulas

Vasicek default rate: d = Φ((Φ⁻¹(p) − √ρ Z) / √(1 − ρ))
OC test: par / Σ balances to the class ≥ trigger