medium · Asset-Backed Securities clos
A CLO manager is considering adding a new loan to a $1 billion portfolio during the reinvestment period. The portfolio currently has a Weighted Average Spread (WAS) of 360 bp (floor 350 bp) and a Weighted Average Rating Factor (WARF) of 2850 (cap 2900). The new loan is a $20 million position with a spread of 320 bp and a rating factor of 3100.
Which test is most at risk of being breached by this trade?
- Neither test, because a $20 million trade is too small to shift a $1 billion CLO portfolio's weighted averages
- Only the WARF test, because the WAS floor covenant applies only at the end of the reinvestment period, not to interim trades
- Only the WAS test, because the WARF cap is recalculated monthly based on the trustee's 'Moody's Diversity Score' for the pool
- Both the WAS and WARF tests may be breached, as the new loan is below the current WAS average and above the WARF average
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