Overcollateralization (OC)
Asset-Backed Securities glossary · CLOs & Structured Credit
Definition
The excess of pool principal over outstanding bond principal, providing first-loss protection.
Overcollateralization (OC) in plain English
Overcollateralization means the pile of loans backing a deal is bigger than the bonds it's paying off — there's more asset than debt. That cushion absorbs the first losses: if some borrowers default, the extra collateral eats the damage before bondholders feel anything. For example, $105 of loans supporting only $100 of bonds gives $5 of built-in shock-absorption. It's like packing a suitcase rated for 55 pounds when the airline limit is 50 — that spare margin keeps you safe if a few things weigh more than expected.
Also called: OC
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