hard · Asset-Backed Securities clos
A broadly syndicated CLO is past its reinvestment period and is currently failing its senior overcollateralization (OC) test. The manager identifies a CCC-rated loan trading at 78 that it expects to recover near par, and a B-rated loan trading at 99 of similar par. The CLO's CCC bucket is already above its 7.5% limit, so excess CCC par is carried at market value in the OC numerator.
Holding the post-trade portfolio par roughly constant, which single trade does the MOST to cure the senior OC test on the trade date?
- Sell the B-rated loan at 99 and buy the CCC loan at 78, because the deeply discounted purchase price adds more par per dollar spent to the OC numerator
- Sell the deepest-discount excess-CCC loan and reinvest proceeds into the B-rated loan at 99, lifting the haircut portion of the numerator toward full par value
- Sell the CCC loan at 78 and distribute all of the sale proceeds directly to equity, shrinking the numerator further but nonetheless still improving the overall ratio
- Buy additional CCC par outright with available principal cash, since CCC loans that are purchased below a price of 80 are credited at full par in the senior OC numerator
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