A closer look at the waterfall.

Since the waterfall is a significant credit enhancement. Let's look at this a little bit more closely to see how it works when things are going well and also if things do not go well.

Collateral proceeds or cash flows flow into the SPV the trustee and collateral manager are paid their fees first. However, only a portion in the case of the collateral manager because the role of the manager has in choosing the loans and managing them part of that. The is tied to Performance in place Junior to the senior tranches of debt.

The proceeds then flow to the senior note holders AAA then double A.

Assuming all goes well as depicted in green the cash then flows down to the mezzanine levels at which time the subordinated management fee is paid and then the residual cash flows to the equity holders. If the pool does not pass the coverage collateral test at any point as shown here on the red side. Then the senior notes are paid off before any cash can go below depending on the situation the interest Ode to the junior trash is might accrue as a pick or paid in kind instrument for later payment.

If the pool recovers after some fine-tuning by the asset manager and the coverage tests are met it can get back to the green side at any point. Keep in mind if the senior notes are all redeemed. The equity holders are most likely to exercise their option to call the pool. However, if this breach were to happen during the no call period the equity holders are stuck and have to live with low or negative excess spreads.