In workout 5 we're going to use the same clo example from above.

However, now there have been a series of defaults.

The actual cash flow is 50% of what was expected. So we're going to calculate the waterfall to see in which trash or trashes. There will be a default.

So we have the weighted average return which was calculated above in problem one and now we need to use that weighted average return to calculate the cash flow expected into the clo which is going to be equal to the 3.62% times the sum of all of the liabilities that are generating that return.

And that gives us 13.7.

Now the actual cash flow is going to be half of that because of the defaults.

We're also going to introduce the concept of trustee and Senior manager fees. These are basis points as calculated on the total fund size.

So I'm going to take that basis point I'm going to divide it by a hundred and then divide it by 100 again to put it into percentages and then I'm going to apply it.

To the total capitalization of the clo lastly. I'm going to take it and I'm going to make it negative so that it shows as an outflow of my cache available.

I'll do the same thing for the senior manager fee. I'll take the 20. I'll divide it by a hundred divided by a hundred and multiply it by total capitalization.

And then I'll also make that a negative.

So my net cash flow.

Is the 6.8.

Plus the negative 4 plus the negative 8 for a total of 5.6.

So it is with this amount that I can begin to pay my liabilities.

The cash flow that is needed here is going to be the cost of the liability times the amount of capital in that trash. So here it's going to be 3.4 for the Triple A. And if I copy this down, I'll get the amount for each of the Torches and remember that the equity trash which is of course not guaranteed or contractual.

That's going to be calculated not on the value of the equity but on the value of all of the liabilities. The next thing I'm going to do is determine if the cash flow that I have is enough to pay.

The amount owed in that particular charge, so I'm going to use a Min function and I'm going to compare.

The net cash flow and I'll anchor that.

with the cash flow that I need and in this case, I needed 3.4 and I have 5.6. So that's not a problem.

when I get to the next Challenge double A. I can't just copy this down because what I have to actually take into consideration, is that in addition to? The point seven that I owe the double A. I have already paid the 3.4 to the Triple A.

So I'm just going to modify this formula to say.

compare the 5 .6.

Less the 3.4 and I'll do this as a sum function because I'm going to be adding these tranches as I go down. So it's going to be the 3.4.

And I'll hit.

Colon and hit 3 the 3.4 again.

Which gives me e154 twice? and then what I can do here is I can actually go ahead and anchor the first Part of that sum function. So I'm anchoring the first of the e54s. Now when I copy this down that will stay anchored and the sum will expand down. So as of right now, I'm still okay. I'm not in default if I go down one more it looks as though. I'm still okay. It's taking the 5.6. It's netting the 3.4 and the point seven.

And it's giving me enough to pay down what I owe. I'll take it down one more and I still look good.

I go down again, and now I run into trouble because I have a 0.1 which is not enough to cover the 1 million that I owe this trash.

And if I copy it down again, obviously for all the trashes below that I'm going to be.

In default. So what I can do here is I have some conditional formatting creeping in and that's why this is showing up the Shaded red. I'm just going to go and copy this formatting.

over the rest of the cells and what shows here is that? I run out of cash at the Double B trash and therefore I'm in default at that point. I obviously will not have any cash available to pay any of the trashes Beyond double b the formulas for these actual cash flow and the expected cash flows are off here to the right.