medium · Frm Part 2 Credit Risk
How does an 'Overcollateralization (OC) Test' in a Collateralized Loan Obligation (CLO) protect senior noteholders during a credit downturn?
- It triggers an immediate liquidation of all underlying loans to repay the senior notes at par.
- It increases the coupon rate paid to senior noteholders to compensate for higher risk.
- It redirects interest cash flows to pay down senior principal if the collateral-to-notes ratio falls below a threshold.
- It requires the collateral manager to inject new capital into the SPV.
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