medium · Private Credit documentation-covenants-terms
A CLO equity investor is analyzing a portfolio where the underlying loans have 1.00% floors.
If SOFR is 0.25%, how does this impact the residual cash flow to the equity tranche?
- The floor benefit passes directly through to the AAA tranche
- Residual cash flow is blocked outright once coverage tests trip
- Residual cash flow decreases due to compressed interest income
- Residual cash flow increases (positive 'basis' or 'arbitrage')
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