medium · Debt Capital Markets bond-instruments-structures
In a CLO (Collateralized Loan Obligation), what is the function of the Over-collateralization (OC) test?
- It requires the par value of the loan collateral to exceed the par value of the senior debt tranches.
- It checks whether the pool's interest income adequately covers the senior tranche coupon obligations.
- It caps the share of CCC-rated and lower-quality loans the collateral manager is permitted to purchase.
- It sets the periodic management fee paid to the collateral manager out of the structure's waterfall flows.
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