106 MODELING STRUCTURED FINANCE CASH FLOWS WITH MICROSOFT EXCEL
There are endless possibilities for the amount and timing of the available cash in the
transactions. The same variability can be seen on the liability side in the cash flow
waterfall.
Different liability structures can be put in place to work with any given pool
of assets. Stress scenarios are then run to see how the liability structure handles
defaulted assets. Up to this point, the only form of protection against loss or credit
enhancement is excess spread. When excess spread is not enough to help pay the
liabilities off by the final maturity of the transaction, then the debt holders will
sustain a loss. To a lesser extent, there can be situations where interest is not
completely paid and the debt holders receive less return than anticipated.
While excess spread in a transaction is an excellent source of protection,
structured transactions have developed multiple methods of protecting against
stressed situations. These methods add another level of complexity to a model, but
must be incorporated to accurately model a transaction. The next chapter explains
these advanced cash flow structures and shows how to incorporate them into a
model.
