CLO Valuation

Solution

• Data Collection: JMI team gathered information on the composition of ABC Investments' CLO portfolio. Team had identified the individual CLOs held, including their underlying leveraged loans, tranche structure, and associated cash flows. Determined the size of each CLO and its relative importance within the portfolio.
• Market Data Analysis: JMI team collected and analyzed market data, including loan market spreads, credit default swap (CDS) rates, interest rate curves, and other market indicators. Our team also keep updated on market trends and changes that may impact CLO valuations, such as shifts in credit spreads or changes in loan performance.
• Cash Flow Projection: Estimated the future cash flows from each CLO in the portfolio. Considered factors such as the interest income generated by the underlying loans, prepayment rates, defaults, recoveries, and reinvestment assumptions. JMI team also used historical data, market conditions, and credit rating agency reports to inform cash flow projections. Determined an appropriate discount rate to apply to the estimated cash flows considering the risk of each CLO tranche and the prevailing market rates.
• Monte Carlo Simulation: Team had performed a Monte Carlo simulation to incorporate uncertainty into the CLO valuation. Simulated various scenarios based on different assumptions about interest rates, default rates, and other relevant factors and calculated the range of potential CLO valuations and assess the associated probabilities of each scenario.
• Sensitivity Analysis: Conducted sensitivity analysis to identify key drivers impacting CLO valuations. JMI team also evaluated how changes in variables such as interest rates, credit spreads, default rates, or prepayment rates affected the value of the CLO portfolio. Assessed the sensitivity of the portfolio to different market factors and identify the most significant risks.