hard · Asset-Backed Securities clos

How does an 'Appraisal Reduction' in a CMBS deal differ from a 'Default Haircut' in a CLO OC test?

  1. A CLO haircut is only applied once a loan has defaulted or been downgraded for a defined grace period, while an appraisal reduction can occur immediately.
  2. Appraisal reductions in CMBS apply only to the senior-most bond classes, while CLO haircuts under the OC test apply solely to the junior bonds.
  3. There is no real difference; both terms simply refer to the same type of market-value write-down applied to a pool's underlying collateral.
  4. An appraisal reduction primarily limits servicer advances and interest flow, whereas a CLO haircut directly affects principal coverage triggers.

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