Structured Finance, CLO Securitizations & Cashflow Waterfall Covenants
CLO Overcollateralization (OC), IC Test & Cure Paydown Formula
Calculate Collateralized Loan Obligation (CLO) Tranche Overcollateralization (OC) Ratio, Par Cushion Over Trigger ($M), Interest Coverage (IC) Ratio, and Senior Note Paydown Cure Required via Equity Interest Diversion.
Avoid the OC-cure denominator trap when CLO equity cash diversions trigger!
In a Collateralized Loan Obligation (CLO) or ABS securitization, each rated tranche is protected by two cashflow diversion gates: the Overcollateralization Test (OC_Ratio = Adjusted_Performing_Collateral_Par / Cumulative_Tranche_Notes_Par >= OC_Trigger) and the Interest Coverage Test (IC_Ratio = Net_Collateral_Interest_Collections / Cumulative_Tranche_Interest_Due)! When loan defaults or CCC-bucket haircuts push Performing_Collateral_Par below Tranche_Par * OC_Trigger, the indenture diverts residual equity interest cash to pay down Senior Class A Notes! A classic modeling mistake is setting Senior Note Cure Paydown equal to the raw par shortfall (Tranche_Par * OC_Trigger - Collateral_Par); because diverted INTEREST cash shrinks denominator notes without reducing numerator collateral par, solving Collateral_Par / (Tranche_Par - Cure) = OC_Trigger gives exact Cure Paydown = Tranche_Par - (Collateral_Par / OC_Trigger)!
Verify on a Class D Junior Mezzanine CLO Test—Adjusted_Performing_Par = $420.00M (B2), Cumulative_Class_A_to_D_Notes_Par = $350.00M (B3 -> Actual OC Ratio = 420 / 350 = 1.2000 or 120.00% in E2), Indenture_OC_Trigger = 1.1200 (112.00%, B4 -> Par Cushion = 420 - 350*1.12 = +$28.00M in E3), Net_Interest_Proceeds = $31.50M (B5), and Cumulative_Note_Interest_Due = $21.00M (B6 -> IC Ratio = 31.5 / 21 = 1.5000 or 150.00% in E4): because 1.2000 >= 1.1200, Required Senior Note Cure Paydown is $0.00M (E5)!
| CLO Indenture Test Metric ($420M Par, $350M Notes, 112% Trigger, $31.5M/$21M Int) | Formula | Verified Output |
|---|---|---|
| Overcollateralization Ratio (OC) | Adjusted_Collateral_Par / Cumulative_Note_Par | 1.2000 (1.0560 @ $369.6M Par) |
| OC Par Cushion / (Deficit) ($M) | Collateral_Par - Note_Par * OC_Trigger | +$28.00M (-$22.40M @ $369.6M) |
| Interest Coverage Ratio (IC) | Net_Interest_Collections / Note_Interest_Due | 1.5000 |
| Interest-Diversion Senior Cure ($M) | IF(OC >= Trigger, 0, Note_Par - Par / Trigger) | $0.00M ($20.00M Cure @ $369.6M) |
CLO Interest-Diversion Senior Note Paydown Cure Formula
Validate Collateral_Par > 0, Note_Par > 0, OC_Trigger > 1, Interest_Collections >= 0, and Note_Interest_Due > 0! When collaborating on trustee waterfall reconciliations in Arte Sheets, ask the AI assistant for a hint on solving the post-paydown ratio equation before accepting a teammate’s cell suggestion.
=LET(cl_p, B2, nt_p, B3, tr_g, B4, ic_c, B5, in_d, B6, IF(OR(cl_p <= 0, nt_p <= 0, tr_g <= 1, ic_c < 0, in_d <= 0), "Invalid CLO Waterfall Input", IF(cl_p / nt_p >= tr_g, 0, ROUND(nt_p - (cl_p / tr_g), 2))))CCC Haircut & Default Breach Check (Set Adjusted Collateral Par = $369.60M)
Drop Adjusted_Performing_Par B2 to $369.60M: OC Ratio E2 falls to 1.0560 (breaching 1.1200 with a -$22.40M par shortfall in E3), and Exact Senior Note Cure Paydown E5 evaluates to 350 - (369.60 / 1.12) = $20.00M—paying Senior Notes down to $330.00M so 369.60 / 330.00 = 1.1200 exactly!
=IF(ISTEXT(E5), E5, ROUND(B2 - B3 * B4, 2))Try the example
Use the original values or change them to test your understanding.