hard · Debt Capital Markets
In a Collateralized Loan Obligation (CLO) structure, what is the primary function of the Interest Coverage (IC) and Over-Collateralization (OC) tests?
- To calculate the net asset value of the portfolio for daily trading purposes.
- To increase the dividend yield to the equity tranche during market downturns.
- To automatically divert cash flows from junior tranches to pay down senior debt if the collateral pool deteriorates.
- To ensure that the collateral manager only buys investment-grade loans.
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