medium · Asset-Backed Securities
A 'CLO' portfolio currently has 12% of its assets rated 'CCC'.
If the 'CCC' limit in the indenture is 7.5%, how does this usually affect the 'Overcollateralization' (OC) test?
- The interest proceeds generated from the 'CCC' assets are redirected immediately to pay the subordinate equity holders in the deal.
- The entire underlying loan portfolio is immediately marked to market, and the deal is fully liquidated within thirty days.
- The manager is prohibited from selling any 'CCC' assets until the concentration drops below 7.5%.
- The excess 'CCC' assets (the 4.5% over the limit) are 'haircut' and valued at market price or a fixed recovery for the OC test.
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