medium · Asset-Backed Securities
In a CLO, what typically happens when the overcollateralization test for the Class A notes fails?
- Cash otherwise available to junior claims is redirected through the waterfall to pay down Class A until the test cures.
- The collateral manager is automatically removed and every loan is sold immediately, regardless of market conditions.
- The Class A coupon resets to zero while all principal collections continue to be distributed to the equity tranche.
- Equity distributions accelerate while Class A principal payments stop until the collateral portfolio regains par value.
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