CLOs on the Menu: The Waterfall Taco — Who Gets Paid First When Credit Cracks

• TACO TUESDAY #13

Five investors. One enormous taco platter. But nobody gets an equal plate.

One investor gets served first. Another waits. And the last investor gets whatever remains. If the kitchen performs perfectly, that last plate could be loaded. If the ingredients run short, that investor could leave hungry.

Welcome to the strange, layered and frequently misunderstood world of collateralized loan obligations.

In this Taco Tuesday episode of the Unbearably Bullish Podcast, Donald Johns takes you inside the Cash Flow Cantina—where corporate loans become ingredients, cash flows become a waterfall and the order of payment decides who enjoys the meal and who gets burned.

A CLO does not make credit risk disappear. It reorganizes it.

• IN THIS EPISODE:

• What a CLO is—and what leveraged loans are
• Tranches explained: senior debt, mezzanine and junior debt, and CLO equity
• The payment waterfall—and why the contract controls the serving order
• Why a strong rating does not mean immunity from risk
• Coverage tests: over-collateralization and interest coverage
• How cash can be redirected away from equity before the structure collapses
• Evaluating the chef: the role of the CLO manager
• The bull case vs. the bear's four bottles of hot sauce: default, downgrade, liquidity and leverage
• How CLOs differ from the mortgage structures of the financial crisis
• The CLO STACK checklist: Collateral, Layer, Operator, Stress, Tests, Access, Compensation, Knowledge

• THIS WEEK'S CHALLENGE:

Draw a five-level waterfall and answer: Who receives cash first? Who absorbs pressure first? What protects the senior tranches? What could interrupt distributions? Which layer could you confidently explain—not merely own?

Do not begin with the yield. Begin with the payment order.

When credit is flowing, everyone admires the fountain. When credit cracks, only one question matters: Where are you standing beneath the waterfall?