Timeline of a structured product.

Let's look at the overall life of our structured product example the CLO.

The first step in creating a structured product is to create the SPV.

next Begins the warehousing period this lasts for three to six months and this is where the manager of the CLO purchases the initial collateral.

This leads to what is known as the ramp up period which is the next one to six months where the collateral manager is purchasing the remaining collateral and performing coverage tests at the end of the six months the funding of this SPV has closed.

The non-call period is the period from about six months to two years where agreed upon spreads are paid to the tranches typically in this period the SPV cannot be called the equity holders in a CLO maintain a call option essentially to to close down the CLO when necessary. Typically the non call period is the period when that call option cannot be exercised.

The reinvestment period is from one to five years typically and that's when the manager purchases or sells bank loans to improve the performance of the CLO.

Occasionally loans have to be replaced due to amortization or to prepayments.

The ability of a collateral manager to make profits on these loans can bring excess profits that flow through to the equity trash. This is what is known as par building.

In the later years of a CLO we start to see the repayment of loans and the deleveraging of the special purpose vehicle this last usually one to four years.

And this is when the capital structure begins to change as the underlying loans are repaid the triple a trans of course is going to get repaid first. And once that cheap capital at the top of the capital structure starts to go away.

The excess spread begins to narrow forcing the equity holders to exercise that call option and begin to close down the special purpose vehicle. It should be noted that there are two kinds of structured credit pools one is called a reinvestment pool and the other is called the static pool. The reinvestment pools have longer timelines because they're building on the pool of assets as the loans are repaid or prepaid.

Static pools do not replace prepaid loans. So the payments flow to the triple a trans more quickly and the equity holders will exercise their options sooner as that excess spread will fall much sooner than in a reinvestment pool the legal maturity of a CLO can last as long as 13 years.

This would assume that by the time the reinvestment period ended the pool of loans at that time had an expected maturity of seven to eight years in reality. The weighted average life of the fund is more likely to be six to nine years.