Cash Flow modelling for ABS & CLO’s

Ah, swinging from the trees of credit analysis, are we? Let's get you geared up for that climb! When it comes to modeling cash flows for CLOs (Collateralized Loan Obligations) and ABS (Asset-Backed Securities), you're essentially trying to predict the cash flows from a pool of loans or assets that back the security. Here's a rough guide to get you started:

1. Understand the Assets: Dive deep into the pool of assets. For ABS, this could be anything from auto loans to credit card receivables. For CLOs, it's typically corporate loans. You'll want to understand the payment structures, interest rates, maturities, and credit quality.

2. Cash Flow Waterfall: This is the heart of the model. Cash flows from the assets are distributed according to a predetermined set of rules known as the "waterfall." Senior tranches get paid first, followed by mezzanine, and then equity tranches. You'll need to model these tranches and their respective cash flow allocations.

3. Default Assumptions: Include assumptions about default rates based on historical data and future expectations. This will affect the cash flows as defaults mean a loss of income.

4. Prepayment Speeds: Especially for ABS, prepayment can significantly affect the cash flows. You'll need to make assumptions about prepayment speeds (often using CPR - Conditional Prepayment Rate).

5. Interest Rate Scenarios: Model different interest rate scenarios, especially for floating-rate securities like CLOs. This will show how changes in interest rates affect cash flows.

6. Stress Testing: Apply various stress scenarios to see how the cash flows hold up under adverse conditions. This could include economic downturns, spikes in default rates, or rapid changes in interest rates.

7. Legal Structure: Understand the legal structure of the CLO or ABS, as this can affect the flow of funds and the rights of different tranches.

As for resources, based on the highest ranked content on WSO, the WSO's 13-Week Cash Flow Modeling Course could be a great place to start. It's not specifically tailored to ABS or CLOs, but it will give you a solid foundation in cash flow modeling. Additionally, the WSO Free Modeling Series offers financial modeling lessons that could be beneficial.

For books, "Investing in Credit Hedge Funds: An In-Depth Guide to Building Your Portfolio and Profiting from the Credit Market" by Putri Pascualy covers a range of credit investment strategies and could provide some insights into modeling for credit instruments.

Remember, practice makes perfect. So, grab those resources, peel a banana, and start crunching those numbers!

Sources: Seeking advice on Corporate Banking modeling, Tutorial: How to Model a Real Estate Development Construction Loan, How to Convince My Boss to Include Excel Modeling Into the Job?, Model Layout, WSO's 13-Week Cash Flow Modeling Course Is Now Live