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.
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