medium · Asset-Backed Securities clos
In a $600M CLO, the BB tranche of $18M has $60M of equity below it.
If the manager can reinvest principal for 4 years at a stressed net spread of 200 bps (after losses and fees), how does this reinvestment feature influence the BB break-even CNL compared to a static pool?
- It decreases break-even by extending the weighted average life of the BB tranche.
- It decreases break-even because new loans introduce additional default risk.
- It has no effect because OC tests force paydowns if the pool deteriorates.
- It increases break-even by accumulating extra spread over the reinvestment period.
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