Chapter 5
Static Synthetic CDO Cash Flow Waterfall Model
In this chapter we illustrate a working cash flow waterfall model for a hypothetical synthetic collateralized debt obligation (CDO), appropriately named “Synthetic CDO Ltd.,” issue size $115 million. The object is to demonstrate how the cash flow waterfall would be laid out when modeled for the structuring of the deal.
The model describes a partially funded synthetic CDO, with a super-senior portfolio credit default swap (CDS) and tranched credit-linked notes (CLNs). The assets of the CDO are single-name CDS contracts that reference a portfolio of 100 corporate names. The proceeds of the CLN issue are invested in collateral securities of German bunds, which are then repo'd out to a repo counterparty and act as collateral for the CLN issue. The return on the collateral securities represents an element of credit protection for the CLN investors, who can expect a minimum return based on return on collateral. However, the excess return to CLN noteholders is made up of the credit-linked return, linked to the reference assets.
The definitions refer to a hypothetical offering circular (OC) for this transaction.
Exhibit 5.1 shows the note tranching of this transaction and a summary of deal terms and static data.
Exhibit 5.1 Synthetic CDO Ltd. static data
The waterfall itself is shown in Exhibit 5.2. This describes the priority of ...
