medium · Debt Capital Markets bond-instruments-structures
In the context of a CLO (Collateralized Loan Obligation) waterfall, what is the primary function of an OC (Over-collateralization) test?
- To measure the interest coverage of the underlying loan portfolio relative to total debt.
- To allow the collateral manager to trade out of distressed assets without restriction.
- To divert cash flow to amortize senior tranches if collateral value falls below a threshold.
- To increase the dividend yield of the equity tranche during periods of low defaults.
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