hard · Corporate Credit Analysis
In an ABS structure, if the 'Overcollateralization' (OC) test fails, what is the most common consequence in the cash flow waterfall?
- The interest rates on all tranches are increased to compensate for the higher risk.
- The residual equity holder receives a 'catch-up' distribution to maintain their percentage ownership.
- The originator must immediately repurchase the delinquent loans in the pool.
- Excess spread is diverted to pay down the principal of the most senior tranches until the OC ratio is restored.
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