medium · Asset-Backed Securities
In a CLO (Collateralized Loan Obligation), if an Overcollateralization (OC) test fails, what is the mandatory structural remedy?
- The equity holders are required to provide a 'cash call' to the trust to replenish the collateral balance.
- The senior-most tranche is automatically downgraded by the rating agency to reflect the lack of asset coverage.
- Interest cash flows that would have gone to the equity and junior tranches are diverted to pay down the principal of the senior-most bonds.
- The collateral manager must sell all 'CCC' rated loans immediately and replace them with 'B' rated loans.
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