medium · Private Credit documentation-covenants-terms
A $500 million CLO (Collateralized Loan Obligation) collateral pool suffers a series of defaults that reduce the par value of the loans. As a result, the Overcollateralization (OC) test fails.
What is the immediate consequence for the CLO Equity holders?
- The CLO is immediately and fully liquidated by the trustee upon this breach.
- Cash flows are redirected to pay down senior tranches, cutting off distributions to equity.
- The CLO's Equity holders are required to inject additional fresh capital into the vehicle.
- The interest rate on all of the loans in the collateral pool is automatically increased across the board.
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