Overcollaterization in CLO

mapleleafs · July 21st, 2006, 4:08 am

How does overcollaterization work? If the OC ratio is triggered, what results should we get?If I buy equity tranche, what is the common OC ratio at inception? still >1?thanks

mellisacat · July 21st, 2006, 8:59 pm

OC works when you need funding desparately for your BBB assets, but CP usually requires AA rating and above. Basially, you collaterize your $500mm BBB assets, get yourself an insurer/agent, paying them a fee, so that you are allowed to issue $300mm AA rated CP. The $200mm was used as OC becase of the higher risk your BBB assets are exposed to. OC allows you to get the funding you need without actually selling the underlying. The OC ratio usually varies by contract. The same objective can be achived by setting up an SPV rather than CMO or CLO.

mapleleafs · July 22nd, 2006, 1:04 am

so is OC trigger (limit) important to equity tranche? or more important to senior tranche? If there's a managed CLO with no OC limit and IC limit, is it worth to invest?