medium · Debt Capital Markets bond-instruments-structures
In a CLO structure, what is the role of the 'Overcollateralization (OC) Test'?
- It compels the CLO manager to deposit additional cash collateral whenever floating market rates drift below the deal's contractual LIBOR or SOFR floor on the rated note tranches.
- It computes the largest single-name exposure the CLO manager may hold against any one individual underlying corporate borrower within the actively managed senior loan pool.
- It checks whether the periodic interest income generated by the underlying loan portfolio is enough to cover the coupon payments owed across the rated tranches.
- It ensures the principal value of the loan portfolio exceeds the principal of the debt tranches by a set margin; if it fails, cash is diverted to repay senior investors.
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