easy · Asset-Backed Securities clos
A CLO manager is managing a pool of leveraged loans. One of the 'Overcollateralization Tests' fails for the Class B bonds.
What is the standard mechanical consequence of this failure in the CLO waterfall?
- The manager is immediately terminated for cause, and a Special Servicer is appointed to wind down the remaining loan portfolio entirely.
- The underlying leveraged loans in the portfolio are promptly liquidated at prevailing market prices to return par to investors.
- Interest collections that would have gone to the Equity/Subordinate holders are redirected to pay down the principal of the Class A bonds.
- The Class B bonds are written down to zero, with the recovered principal used to restore the required coverage ratio for the senior Class A bonds.
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