Structured Credit & Securitization
Technical reference for CLO mechanics, ABS structures, waterfall priorities, and structured credit fundamentals.
CLO Mechanics & Cash Flow
Coverage tests, waterfall priorities, and cash diversion mechanics governing CLO distributions.
Waterfall Priority
Sequential distribution of cash flows from senior debt to equity—interest and principal waterfalls.
Overcollateralization (OC) Tests
How OC tests protect senior debt through collateral coverage requirements and cash flow diversion.
Interest Coverage (IC) Tests
Measuring whether interest income covers debt payments and triggers for cash flow diversion.
Cash Flow Diversion
How failed coverage tests redirect cash from equity to debt tranches.
Principal Proceeds Allocation
How principal repayments flow through CLO—reinvestment vs amortization dynamics.
Reinvestment Period
Period when managers actively trade collateral and recycle principal proceeds.
Sequential Pay Structure
How sequential pay CMOs allocate principal payments to tranches in strict priority order.
Pro-Rata Pay Structure
Proportional principal distribution across tranches based on outstanding balances.
Portfolio Management & Constraints
Portfolio quality metrics, concentration limits, and manager trading constraints.
WARF (Weighted Average Rating Factor)
Measuring credit quality of CLO collateral pools using Moody's rating factors.
Weighted Average Spread (WAS)
Portfolio income metric determining coverage test cushions and equity distributions.
Diversity Score
Moody's concentration metric converting portfolio into equivalent uncorrelated exposures.
CCC Buckets
Limits on low-rated exposure and haircuts applied to excess CCC holdings.
Portfolio Profile Tests
Comprehensive CLO constraints—obligor limits, industry concentration, rating buckets.
Manager Discretion
Trading authority and constraints on CLO manager portfolio decisions.
BWIC Trading Mechanics
Bids-wanted-in-competition process for selling loans in secondary markets.
Rating & Risk Analysis
Rating agency methodologies, recovery assumptions, and stress testing frameworks.
Rating Methodologies (S&P, Moody's, Fitch)
How rating agencies model CLO credit risk—comparing frameworks and stress scenarios.
WARR (Weighted Average Recovery Rate)
Expected recovery rates across collateral pool—critical input for rating agency loss models.
Break-Even Default Rate (BDR)
Cumulative default rate at which tranche experiences zero return—cushion analysis.
Structural & Legal Frameworks
SPV structures, bankruptcy remoteness, and legal mechanics enabling securitization.
Cayman SPV Structures
Why CLOs use Cayman entities—bankruptcy remoteness, tax efficiency, regulatory arbitrage.
Subordination Analysis
Tranche thickness and credit enhancement mechanics—loss absorption capacity.
True Sale
Legal transfer mechanics ensuring bankruptcy remoteness and SPV isolation.
Bankruptcy Remoteness
Legal structures isolating SPV assets from originator bankruptcy.
Perfection
Legal steps to establish enforceable security interests in collateral.
Representations & Warranties
Seller guarantees about loan quality and enforceability in securitizations.
Risk Frameworks
Understanding systemic risk, forced selling, and market dislocations in structured credit.
Liquidity Risk vs Credit Risk
Distinguishing temporary price dislocations from fundamental credit impairment.
Forced Seller Dynamics
How regulatory, accounting, and liquidity constraints create non-economic selling.
Funding Horizon Mismatch
Short-term financing of long-term assets—refinancing risk and forced deleveraging.
Extension Risk
When slower prepayments extend weighted average life beyond expectations.
Prepayment Risk
How faster-than-expected prepayments compress yields and shorten duration.