medium · Debt Capital Markets
In a CLO structure, what is the role of the 'Overcollateralization (OC) Test'?
- It requires the CLO manager to post additional cash collateral if market interest rates fall below the LIBOR/SOFR floor.
- It calculates the maximum amount of debt the CLO manager can issue against a single corporate borrower.
- It tests whether the interest income from the loans is sufficient to cover the interest payments on the 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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