medium · Debt Capital Markets bond-instruments-structures
In a CLO (Collateralized Loan Obligation) structure, what occurs if the Overcollateralization (OC) test for the senior tranche fails?
- The whole vehicle is unwound at once and the loan portfolio is sold into the secondary market.
- Cash flows intended for the junior and equity tranches are diverted to pay down the principal of the senior tranche.
- The collateral manager is automatically removed for cause the moment one overcollateralization threshold breaks.
- Senior tranche holders become contractually obligated to subscribe fresh capital into the equity layer to rebuild it.
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