How Quickly Would AAA Be Paid Down Upon OC Test Breach?
Based on a sample size of 95 global CLO deals issued in 2007, 64 deals had breached their OC tests (on average, around eight months of OC test breach) in 2009.
The average AAA factor at the end of Jan 2010 was 97.8%! Managers reinvested most of the principal proceeds during the reinvestment period in accordance with the terms laid out in the documents, and hence AAA factor remained high.
Around 76% of global CLO deals (post-2012) have a reinvestment period of over one year. After the end of the reinvestment period, purchases are typically subject to certain limitations based on collateral quality and profile tests, OC coverage tests, maturity and par amount requirements.
CLO deals have also incorporated the concept of a restricted trading period where the manager is restricted from reinvesting after the end of the reinvestment period if the senior notes’ ratings are one notch or more below the original ratings, or for the mezzanine notes, the rating is two or more notches below the original rating. Most deals gave the controlling class of note holder to vote to override the restricted trading period. In other deals, if the portfolio is above the reinvestment target par and if all the collateral quality tests and/or OC coverage tests are satisfied, the restricted trading period will not take effect.
Disclaimers
The information, research, data, research related opinions, observations and estimates contained in this document have been compiled or arrived at by CLO Research Group, based upon sources believed to be reliable and accurate, and in good faith, but in each case without further investigation. None of CLO Research Group or its service providers, their directors or authorised personnel make any expressed or implied presentation or warranty, nor do any of such persons accept any responsibility or liability as to the accuracy, timeliness, completeness or correctness of such sources and of the information, research, data, research related opinions, observations and estimates contained in this document. All information, research, data, research related opinions, observations and estimates contained in this document are in draft form as at the date of this document and remain subject to change and amendment without notice. Neither CLO Research Group nor any of their third-party providers shall be subject to any damages or liability for any errors, omissions, incompleteness or incorrectness of this document. This article is not and should not be construed as an offer, or a solicitation of an offer, to buy or sell securities and shall not be relied upon as a promise or representation regarding the historic or current position or performance of any of the deals or issues mentioned in it.
