A conduit pool barely amortises, so the senior classes are told apart by when they are paid, and WAL measures it.
Weight each principal payment a class receives by the time at which it arrives, and divide by the class balance: WAL = Σ(t × principalt) ÷ Σ principalt. On an illustrative $1,000M conduit with an 8.91-year pool WAL, sequential pay gives the $30.0M A-1 class a WAL of 3.71 years, A-2 5.21 years and A-3 7.68, while A-4, A-5 and everything below wait for the year-10 balloons. If the five-year loans extend two years at maturity, A-2's WAL jumps 1.79 years to 7.00.
Worked in full in CMBS and CRE CLOs by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A conduit CMBS pool barely amortises. Most loans are interest-only or amortise over 30 years on a 10-year term, and call protection (lockout, defeasance, yield maintenance) keeps voluntary prepayments rare. Nearly all the principal therefore arrives as balloons at maturity, and the senior block is cut into time tranches that share one level of credit support but take that principal in sequence. WAL is how those time tranches are told apart and priced against the swap curve.
| Loans | Balance, $M | Coupon | Term, years | Amortisation |
|---|---|---|---|---|
| 5-year IO loans | 150.0 | 6.50% | 5 | none |
| 7-year IO loans | 50.0 | 6.40% | 7 | none |
| 10-year IO loans | 500.0 | 6.20% | 10 | none |
| 10-year amortising loans | 300.0 | 6.25% | 10 | 30 years |
| Pool | 1,000.0 |
The capital structure pays principal sequentially: A-1 $30.0M, A-2 $160.0M, A-3 $60.0M, A-4 $250.0M and A-5 $200.0M, then $300.0M of subordinate classes from A-S down to H, 30.0 per cent of the pool.
1. Pool principal by year: scheduled amortisation on the amortising loans, plus each balloon in its maturity year.
2. Allocate sequentially: each year's principal pays the most senior outstanding class until it is retired, then the next.
3. WAL of a class = Σ(t × principalt) ÷ class balance
In Excel, with years in row 3 and a class's principal in row 10: =SUMPRODUCT($C$3:$L$3,C10:L10)/SUM(C10:L10). With monthly periods, divide the result by 12.
The pool pays $3.63M in year 1, rising to $4.36M in year 4 as the amortising loans' principal share grows. Year 5 brings $154.63M, the $150.0M balloons plus amortisation; year 7 $55.22M; year 10 $757.84M. The pool's own WAL is 8.91 years.
A-1 receives all the amortisation of years 1 to 4, $15.94M, then the $14.06M it still needs out of year 5. Its WAL is (1 × 3.63 + 2 × 3.86 + 3 × 4.10 + 4 × 4.36 + 5 × 14.06) ÷ 30.0 = 111.35 ÷ 30.0 = 3.71 years.
| Class | Balance | Principal received | Window, years | WAL, years |
|---|---|---|---|---|
| A-1 | 30.0 | 3.63 / 3.86 / 4.10 / 4.36 / 14.06 | 1 to 5 | 3.71 |
| A-2 | 160.0 | 140.57 / 4.92 / 14.51 | 5 to 7 | 5.21 |
| A-3 | 60.0 | 40.71 / 5.55 / 5.90 / 7.84 | 7 to 10 | 7.68 |
| A-4 | 250.0 | 250.00 | 10 | 10.00 |
| A-5 | 200.0 | 200.00 | 10 | 10.00 |
| Subordinate | 300.0 | 300.00 | 10 | 10.00 |
| Pool | 1,000.0 | 1 to 10 | 8.91 |
The principal window, first to last payment, matters as much as the WAL. A-1 is a five-year amortising bond; A-2 is mostly a five-year bullet, 140.57 of its 160.0 arriving in one year. On a monthly model the 10-year classes would show WALs a little under 10 because the loans mature over the last months of year 10; annual periods round that to the year.
CMBS WAL risk is extension risk, not prepayment risk. A loan that cannot refinance at maturity is typically extended or worked out by the special servicer, and its balloon arrives later. Take the five-year loans extending by two years and the 10-year interest-only loans by one.
| Class | Base | Extended | Change | New window |
|---|---|---|---|---|
| A-1 | 3.71 | 4.18 | +0.46 | 1 to 7 |
| A-2 | 5.21 | 7.00 | +1.79 | 7 |
| A-3 | 7.68 | 7.68 | +0.00 | 7 to 10 |
| A-4 | 10.00 | 10.00 | +0.00 | 10 |
| A-5 | 10.00 | 11.00 | +1.00 | 11 |
| Subordinate | 10.00 | 11.00 | +1.00 | 11 |
| Pool | 8.91 | 9.71 |
The extension does not spread evenly. A-2, priced as a five-year bond, becomes a seven-year one, because the balloons it was waiting for now arrive with the seven-year loans. A-3 is untouched: the same cash still reaches it in year 7. A-4 is also untouched, because the $300.0M of amortising loans still mature in year 10 and cover it in full; A-5 and the subordinate classes, which were waiting for the interest-only balloons, slip a year. The two-year extension of the five-year loans alone produces the whole of A-1's and A-2's change, so the class exposed to a maturity event depends on which loans sit behind it in the queue.
The usual mistake is to read a class's life from the pool: quoting the pool's 8.91 years, or the loans' 10-year term, for a senior bond. Every senior class carries the same credit support, so their only difference is when they are paid, and that is set by the sequence, not the pool average. A-1 at 3.71 years and A-5 at 10.00 years are different instruments priced off different points of the curve. The second mistake is to confuse WAL with the last payment date: A-2's final principal arrives in year 7, but its WAL is 5.21 because most of it is repaid in year 5.
Check the allocation. The sum of every class's principal must equal the pool's, year by year, and the balance-weighted average of the class WALs must equal the pool WAL: here 8.91 years either way. If it does not, principal has leaked or been paid twice.
A CMBS class's WAL is its own principal weighted by time: 3.71 years for A-1 and 5.21 for A-2 on this pool, against a pool figure of 8.91. Run it again with maturities extended, because extension, not prepayment, is what moves a conduit bond's life. The free companion workbooks for the book carry a twenty-loan tape and the fourteen-class stack the same schedule is built from, and how a CMBS waterfall works follows the same principal through a month.
Conduit loans carry lockout, defeasance or yield maintenance, so voluntary prepayment is rare, while a loan that cannot refinance at maturity is often extended. In the illustrative pool, two-year extensions of the five-year loans lengthen A-2's WAL from 5.21 to 7.00 years, and a one-year extension of the 10-year interest-only loans moves A-5 from 10.00 to 11.00.
WAL is the time-weighted average of principal; the window is the span from first to last payment. A-1 in the example has a window of years 1 to 5 but a WAL of 3.71 years. A-2 is repaid between years 5 and 7, with a WAL of 5.21 because 140.57 of its 160.0 arrives in year 5.
Two controls. Class principal must sum to pool principal in every period, and the balance-weighted average of the class WALs must equal the pool WAL. In the illustrative deal both routes give 8.91 years.
This article is one calculation from CMBS and CRE CLOs. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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