medium · Debt Capital Markets
In a CLO (Collateralized Loan Obligation) structure, what occurs if the Overcollateralization (OC) test for the senior tranche fails?
- The entire structure is liquidated and the loans are sold at market price.
- Cash flows intended for the junior and equity tranches are diverted to pay down the principal of the senior tranche.
- The collateral manager is immediately fired for cause.
- The senior tranche holders must inject fresh capital into the equity layer.
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