I have a technical question about CDOs. Suppose a name with notional n defaults; the loss to the underlying basket is
              L = (1-R)*n
and is absorbed by the appropriate tranch. The question is what happens to the recovery, R*n? Does it go to retire part of the super senior (XX to 100) tranche? Or is it just forgotten about? I.e., does the cash flow from all of the tranches add up to the cash flow of the underlying CD index?

Is this different for real paper (CLOs, subordinated loan packages, etc.) than CDOs on index's?
Thanks

For a synthetic CDO (index or bespoke), the recovery amount is applied to reduce the notional of the super senior tranche. The terminology is "write-down from above". I am less confident in my knowledge of the various flavors of funded products, but if memory serves me right, in a CLO the recovery amount will be treated in the same way as proceeds of a loan sale, and thus subject to waterfall rules as to whether it can be reinvested or is directed toward a partial pay-down of principal of a (typically senior) tranche. 

I have a technical question about CDOs. Suppose a name with notional n defaults; the loss to the underlying basket is
              L = (1-R)*n
and is absorbed by the appropriate tranch. The question is what happens to the recovery, R*n? Does it go to retire part of the super senior (XX to 100) tranche? Or is it just forgotten about? I.e., does the cash flow from all of the tranches add up to the cash flow of the underlying CD index?

I'm confused by the double-entry bookkeeping here, specfically by
"the loss to the underlying basket is
L = (1-R)*n
and is absorbed by the appropriate tranch."


Obviously, there's a loss of L=(1-R)*n to the underlying basket.
If the recovery R*n goes to the super senior tranche,
then the loss to the appropriate tranche would be 1*n

1-R is a loss, and is allocated to the lowest outstanding tranche. This takes the form of a cash payment from the seller of protection on that tranche to the buyer, and the tranche notional is reduced by the amount of the payment. R represents a reduction in the total possible loss for the deal. This is implemented via a reduction in the notional of the super senior tranche, without any current cash payment. For both tranches, future premium payments will be reduced along with the notional amounts outstanding. For an untranched index, the same total effect is observed: a payment based on the loss and a notional reduction equal to the index weight of the defaulting name.