Appendix
Sample waterfall
Sample waterfall
This worked example walks through a complete waterfall calculation for a consumer loan securitization. You will see exactly how cash flows through the priority of payments under normal conditions and what changes when performance deteriorates. The numbers are realistic and internally consistent. Use this as a reference when building your own models or reading deal documents.
For the conceptual treatment of waterfall mechanics and negotiation guidance, see The waterfall. For trigger calibration methodology, see Triggers, tests, and performance events.
Deal parameters
This example uses a $100M consumer unsecured loan portfolio financed through a term ABS structure with two note classes and originator-retained equity.
Capital structure
| Tranche | Principal | Coupon | Advance Rate |
|---|---|---|---|
| Class A (Senior) | $80,000,000 | SOFR + 200 bps | 80% |
| Class B (Mezzanine) | $10,000,000 | SOFR + 450 bps | 10% |
| Residual (Equity) | $10,000,000 | Excess spread | 10% |
Illustrative pricing. See pricing disclaimer.
Collateral characteristics
| Parameter | Value |
|---|---|
| Pool balance | $100,000,000 |
| Weighted average coupon | 14.50% |
| Weighted average remaining term | 36 months |
| SOFR (assumed) | 5.00% |
Base case performance assumptions
| Parameter | Value |
|---|---|
| Constant default rate (CDR) | 3.50% annualized |
| Loss severity | 60% |
| Constant prepayment rate (CPR) | 8.00% annualized |
Fees and expenses
| Item | Annual Cost |
|---|---|
| Trustee and administrator | $75,000 |
| Servicer (1.25% of pool balance) | $1,250,000 |
| Backup servicer | $25,000 |
Illustrative pricing. See pricing disclaimer.
Reserve account
| Parameter | Value |
|---|---|
| Initial funding | $2,000,000 |
| Target amount | $2,000,000 |
| Floor (minimum) | $1,000,000 |
Available funds calculation
Each payment date, the waterfall distributes “available funds.” Understanding what goes into that number is the first step.
Annual available interest collections (base case)
| Line Item | Calculation | Amount |
|---|---|---|
| Gross interest on collateral | 14.50% x $100,000,000 | $14,500,000 |
| Less: gross defaults | 3.50% x $100,000,000 | ($3,500,000) |
| Plus: recoveries | 40% x $3,500,000 | $1,400,000 |
| Net interest collections | $12,400,000 |
The gross default amount of $3,500,000 wipes out both principal and accrued interest on those loans. Recoveries of 40% (severity of 60%) recover $1,400,000 over time. Net available interest is $12,400,000.
Annual available principal collections (base case)
| Line Item | Calculation | Amount |
|---|---|---|
| Scheduled principal amortization | ~$27,000,000 (blended) | $27,000,000 |
| Prepayments | 8.00% x $100,000,000 | $8,000,000 |
| Less: principal lost to defaults | 3.50% x $100,000,000 x 60% | ($2,100,000) |
| Net principal collections | $32,900,000 |
Principal collections run through a separate waterfall. Prepayments return principal faster; defaults reduce the principal returned.
Pre-trigger interest waterfall
When all performance tests pass and no trigger events have occurred, available interest collections flow through the following priority of payments.
Available Interest Collections: $12,400,000
|
v
+--------------------------------------------------+
| (1st) Trustee & Administrator Fees: $75,000 |
*Illustrative pricing. [See pricing disclaimer](/reference/pricing-disclaimer/).*
+--------------------------------------------------+
|
v Remaining: $12,325,000
+--------------------------------------------------+
| (2nd) Backup Servicer Fee: $25,000 |
*Illustrative pricing. [See pricing disclaimer](/reference/pricing-disclaimer/).*
+--------------------------------------------------+
|
v Remaining: $12,300,000
+--------------------------------------------------+
| (3rd) Servicer Fee: $1,250,000 |
*Illustrative pricing. [See pricing disclaimer](/reference/pricing-disclaimer/).*
+--------------------------------------------------+
|
v Remaining: $11,050,000
+--------------------------------------------------+
| (4th) Class A Interest: $5,600,000 |
| (7.00% x $80,000,000) |
+--------------------------------------------------+
|
v Remaining: $5,450,000
+--------------------------------------------------+
| (5th) Class B Interest: $950,000 |
| (9.50% x $10,000,000) |
+--------------------------------------------------+
|
v Remaining: $4,500,000
+--------------------------------------------------+
| (6th) Reserve Account Replenishment: $0 |
| (Already at $2,000,000 target) |
+--------------------------------------------------+
|
v Remaining: $4,500,000
+--------------------------------------------------+
| (7th) OC Build / Turbo: $1,500,000 |
| (Until OC reaches 1.10x target) |
+--------------------------------------------------+
|
v Remaining: $3,000,000
+--------------------------------------------------+
| (8th) Originator Residual: $3,000,000 |
+--------------------------------------------------+
|
v Remaining: $0Step-by-step allocation
| Priority | Recipient | Amount | Running Balance |
|---|---|---|---|
| 1st | Trustee and administrator | $75,000 | $12,325,000 |
| 2nd | Backup servicer | $25,000 | $12,300,000 |
| 3rd | Servicer | $1,250,000 | $11,050,000 |
| 4th | Class A noteholders (interest) | $5,600,000 | $5,450,000 |
| 5th | Class B noteholders (interest) | $950,000 | $4,500,000 |
| 6th | Reserve account | $0 | $4,500,000 |
| 7th | OC build / turbo | $1,500,000 | $3,000,000 |
| 8th | Originator residual | $3,000,000 | $0 |
Originator annual residual: $3,000,000
On a $10,000,000 equity position, this represents a 30% cash-on-cash return in the base case.
Pre-trigger principal waterfall
Principal collections flow through a separate waterfall. In this example, the deal is structured for pro rata principal distribution when all tests pass, with step-down to sequential after a trigger event.
Pro rata distribution (tests passing)
| Priority | Recipient | Amount | Running Balance |
|---|---|---|---|
| 1st | Class A principal (pro rata share) | $29,244,444 | $3,655,556 |
| 2nd | Class B principal (pro rata share) | $3,655,556 | $0 |
The pro rata split allocates 88.9% ($80M / $90M of notes) to Class A and 11.1% ($10M / $90M) to Class B.
After this payment:
| Tranche | Beginning Balance | Principal Paid | Ending Balance |
|---|---|---|---|
| Class A | $80,000,000 | $29,244,444 | $50,755,556 |
| Class B | $10,000,000 | $3,655,556 | $6,344,444 |
The originator’s residual does not receive principal distributions in a performing deal. Your return comes from excess spread, not principal.
Post-trigger scenario: OC test failure
Now assume performance deteriorates. CDR rises from 3.50% to 6.50%, a level that trips the delinquency trigger and fails the OC test.
What changed
| Parameter | Base Case | Stress Case |
|---|---|---|
| CDR | 3.50% | 6.50% |
| Gross defaults | $3,500,000 | $6,500,000 |
| Recoveries (40%) | $1,400,000 | $2,600,000 |
| Net interest collections | $12,400,000 | $10,600,000 |
Available interest collections dropped by $1,800,000 due to higher losses.
OC test calculation
The OC test compares collateral balance to note balance.
| Item | Value |
|---|---|
| Collateral balance (after losses) | $96,100,000 |
| Total notes outstanding | $90,000,000 |
| Current OC ratio | 1.068x |
| OC target | 1.100x |
| Result | OC test fails |
The 1.068x OC ratio is below the 1.10x target. This triggers the post-event waterfall.
Post-trigger interest waterfall
Available Interest Collections: $10,600,000
|
v
+--------------------------------------------------+
| (1st) Trustee & Administrator Fees: $75,000 |
*Illustrative pricing. [See pricing disclaimer](/reference/pricing-disclaimer/).*
+--------------------------------------------------+
|
v Remaining: $10,525,000
+--------------------------------------------------+
| (2nd) Backup Servicer Fee: $25,000 |
*Illustrative pricing. [See pricing disclaimer](/reference/pricing-disclaimer/).*
+--------------------------------------------------+
|
v Remaining: $10,500,000
+--------------------------------------------------+
| (3rd) Servicer Fee: $1,250,000 |
*Illustrative pricing. [See pricing disclaimer](/reference/pricing-disclaimer/).*
+--------------------------------------------------+
|
v Remaining: $9,250,000
+--------------------------------------------------+
| (4th) Class A Interest: $5,600,000 |
+--------------------------------------------------+
|
v Remaining: $3,650,000
+--------------------------------------------------+
| (5th) Class B Interest: $950,000 |
+--------------------------------------------------+
|
v Remaining: $2,700,000
+--------------------------------------------------+
| (6th) Reserve Account Replenishment: $500,000 |
| (Depleted to $1,500,000; rebuild to target)|
+--------------------------------------------------+
|
v Remaining: $2,200,000
+--------------------------------------------------+
| (7th) ALL to Class A Principal (Turbo/Sequential)|
| $2,200,000 |
+--------------------------------------------------+
|
v Remaining: $0
+--------------------------------------------------+
| (8th) Originator Residual: $0 |
+--------------------------------------------------+Step-by-step allocation (post-trigger)
| Priority | Recipient | Amount | Running Balance |
|---|---|---|---|
| 1st | Trustee and administrator | $75,000 | $10,525,000 |
| 2nd | Backup servicer | $25,000 | $10,500,000 |
| 3rd | Servicer | $1,250,000 | $9,250,000 |
| 4th | Class A noteholders (interest) | $5,600,000 | $3,650,000 |
| 5th | Class B noteholders (interest) | $950,000 | $2,700,000 |
| 6th | Reserve account | $500,000 | $2,200,000 |
| 7th | Class A principal (turbo) | $2,200,000 | $0 |
| 8th | Originator residual | $0 | $0 |
Originator annual residual: $0
The trigger trapped all excess spread. Your 30% cash-on-cash return dropped to zero with a CDR increase from 3.50% to 6.50%.
Principal waterfall switches to sequential
After the trigger event, principal also flows sequentially rather than pro rata.
| Priority | Recipient | Amount |
|---|---|---|
| 1st | Class A principal | All available principal |
| 2nd | Class B principal | $0 until Class A is fully repaid |
Class B receives no principal distributions until Class A is paid in full.
Side-by-side comparison
| Metric | Base Case | Post-Trigger |
|---|---|---|
| CDR | 3.50% | 6.50% |
| Available interest | $12,400,000 | $10,600,000 |
| Class A interest paid | $5,600,000 | $5,600,000 |
| Class B interest paid | $950,000 | $950,000 |
| Reserve replenishment | $0 | $500,000 |
| OC build / turbo | $1,500,000 | $2,200,000 |
| Originator residual | $3,000,000 | $0 |
| Cash-on-cash return | 30% | 0% |
Class A and Class B noteholders are fully protected. Their interest is paid in full under both scenarios. The originator bears the entire impact of performance deterioration through loss of excess spread.
Severe stress: early amortization
If performance continues to deteriorate (CDR reaches 8%+), the deal may trip an early amortization event.
What triggers early amortization
Most deals define early amortization as:
- CDR exceeds a hard threshold (e.g., 10%) for two consecutive payment dates
- Cumulative net losses exceed a percentage of original pool balance (e.g., 8%)
- OC falls below a floor level (not just target)
- Event of default on the notes
Early amortization waterfall
Once early amortization is declared, the waterfall compresses to a simple sequential liquidation structure.
All Collections (Interest + Principal)
|
v
+--------------------------------------------------+
| (1st) Trustee, Administrator, Servicer Fees |
*Illustrative pricing. [See pricing disclaimer](/reference/pricing-disclaimer/).*
+--------------------------------------------------+
|
v
+--------------------------------------------------+
| (2nd) Class A Interest |
+--------------------------------------------------+
|
v
+--------------------------------------------------+
| (3rd) Class A Principal (until fully repaid) |
+--------------------------------------------------+
|
v
+--------------------------------------------------+
| (4th) Class B Interest |
+--------------------------------------------------+
|
v
+--------------------------------------------------+
| (5th) Class B Principal (until fully repaid) |
+--------------------------------------------------+
|
v
+--------------------------------------------------+
| (6th) Originator Residual |
+--------------------------------------------------+Originator economics in early amortization
At CDR of 8% with 60% severity and a pool that has already amortized, the probability of the originator receiving any distributions approaches zero. Your residual is subordinate to $90M in notes. Unless collateral recoveries exceed total note principal, you receive nothing.
Key takeaways
1. Noteholder protection works
Class A and Class B received full interest payments even when CDR nearly doubled. The waterfall mechanics protect senior creditors by redirecting excess spread upward before the deal is in actual danger of principal loss. This is exactly how the structure is supposed to work.
2. Originator economics are highly sensitive to performance
You moved from 30% cash-on-cash to zero with a CDR increase that did not threaten noteholder principal. The trigger threshold (not the loss level) determines whether you receive cash. Calibrating trigger levels with appropriate headroom is how you protect your distributions during periods of elevated but not catastrophic losses.
3. The post-trigger waterfall is where your risk lives
Most originators focus on the base case waterfall and don’t fully understand what happens when triggers trip. Read the post-event waterfall provisions before signing documents. Understand exactly what CDR, delinquency, or OC level will cut off your distributions.
4. Numbers to remember
| Scenario | CDR | Originator Cash-on-Cash |
|---|---|---|
| Base case | 3.50% | 30% |
| OC test failure | 6.50% | 0% |
| Early amortization | 8.00%+ | 0% indefinitely |
Model this yourself
To build this waterfall into your own financial model:
- Start with gross collateral yield and performance assumptions
- Calculate available interest and principal collections
- Build the payment priority as sequential rows, deducting each payment from the running balance
- Add conditional logic for trigger events (if OC < target, then redirect to turbo)
- Run scenarios at various CDR levels to map your residual sensitivity
A well-built model shows you exactly where your cash-on-cash return drops to zero. That break-even CDR is the number to negotiate around when setting trigger levels.
Cross-references
- The waterfall covers waterfall mechanics, document interpretation, and negotiation strategies
- Triggers, tests, and performance events details trigger calibration, cure mechanics, and the severity spectrum from OC test failure to event of default
- Advance rates and the borrowing base explains how OC levels and advance rates interact with waterfall distributions