Explanation:
Step 1: Calculate total collateral cash flows.
Total collateral = 100 loans × $1.0 million = $100 million.
Collateral interest rate = LIBOR (2.0%) + 300 bps (3.0%) = 5.0%.
Collateral cash flows = $100 million × 5.0% = $5.00 million.
Step 2: Calculate tranche coupon payments.
Senior tranche coupon = $75.0 million × (LIBOR 2.0% + 100 bps 1.0%) = $75.0 million × 3.0% = $2.25 million.
Junior tranche coupon = $15.0 million × (LIBOR 2.0% + 500 bps 5.0%) = $15.0 million × 7.0% = $1.05 million.
Total tranche payments = $2.25 million + $1.05 million = $3.30 million.
Step 3: Calculate excess spread.
Excess spread = Collateral cash flows - Total tranche payments = $5.00 million - $3.30 million = $1.70 million.
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312.2. Assume a collateralized loan obligation (CLO) that has as underlying assets 100 identical leveraged loans, with a par value of $1.0 million each and priced at par. The loans are floating rate obligations that pay a fixed spread of 300 basis points over one-month LIBOR. Assume further there are no upfront, management, or trustee fees. The capital structure consists of a senior bond, a junior bond, and an equity tranche:
The senior debt principal value is $75.0 million and pays an annual coupon of LIBOR plus 100 basis points; the junior (mezzanine) debt principal value is $15.0 million and pays an annual coupon of LIBOR plus 500 basis points
If there are no defaults, and if we assume the LIBOR swap curve is flat at 2.0%, what is the excess spread, i.e., the difference between the collateral cash flows and the tranche coupon payments?
A
Negative due to the high junior coupon
B
$350,000
C
$1.70 million
D
$3.49 million
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