hard · Private Credit fund-structures-returns-economics
A CLO has a $500,000,000 portfolio of leveraged loans. If the Overcollateralization (OC) test for the BBB tranche fails because of several defaults, what is the immediate impact on the CLO equity holders?
- Equity holders must immediately inject fresh capital directly into the CLO.
- The collateral manager's senior and subordinated management fees are permanently waived.
- The CLO is immediately liquidated in full, with all underlying loan assets sold off at once.
- Cash flows are redirected from the equity tranche to pay down the senior-most debt.
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