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Credit Risk Frontiers: Subprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity by Frédéric Patras, Damiano Brigo, Tomasz R. Bielecki

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Chapter 10

Toward Market-Implied Valuations of Cash-Flow CLO Structures

Philippos Papadopoulos

ABN Amro Bank

The market for the debt tranches of cash-flow collateralized loan obligations (CLOs) has been historically a ratings-based buy-and-hold market with little secondary trading activity. With the onset of the credit crisis of 2007–2008, this market structure created significant valuation difficulties. In this work we adopt the hypothesis that an observable, derivatives-based tranche market exists, and we build a framework for deriving implied valuations for the various elements of a simplified cash-flow CLO structure. This is achieved by on the one hand transcribing the complex cash flow structure into a term sheet that can be valued using ...

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