Cash Flow Waterfall
Definition
Principal Deficiency Ledger (PDL)
An accounting mechanism recording the running total of principal losses. When a default occurs, it is debited from the PDL; when excess spread cures it, it is credited. Common in RMBS and CLOs.
Deep Dives
Related Terms
Excess Spread Trap
The capture of excess spread to cure an OC or IC test deficiency. Standard mechanic: trap 50% of remaining interest proceeds (or the exact amount needed to cure, whichever is less) and redirect to senior principal.
OC Test (Over-Collateralisation Test)
Formula: OC Ratio = Performing Asset Par / Outstanding Note Balance. Failure redirects excess interest proceeds to repay senior notes (turbo). CLO Class A/B OC test minimum typically 121–128%.
Cash Flow Waterfall
The contractual priority of payment sequence in a securitisation. Standard structure: senior expenses → senior interest → OC test → junior interest → reserve replenishment → equity distributions.