20 years: Credit & structured finance
In this video, Christos will answer some questions pertaining to the key features and mechanics within a CLO to protect your debt.
In this video, Christos will answer some questions pertaining to the key features and mechanics within a CLO to protect your debt.
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12 mins 9 secs
Debt can be protected by controlling asset quality and repaying the debt quicker. A good CLO portfolio checks and mitigates the risk of default by running asset and portfolio tests to ensure repayment.
Key learning objectives:
Understand how debt is protected and what makes a good portfolio
Define the portfolio profile tests
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So, how can we protect the debt?
If things go wrong you can have defaults in your assets and resulting losses, leaving you with insufficient principal to repay your debt. Or you can simply have asset deterioration, where the quality of your assets gets worse. In the pool, there may well be assets that have not defaulted yet, but they have got bad enough that rating agencies now view them as more likely to default. You can also have shortfalls of interest, your assets not yielding enough to cover the interest payments due on your debt.
Mechanics are in place, to ensure that throughout the life of the CLO, the debt is protected. This is done by the portfolio profile tests, which make sure the portfolio manager maintains a high quality, diversified portfolio and the diversion tests, where interest payments and scheduled principal payments are used to redeem the Notes early.
This content is also available as part of a premium, accredited video course. Sign up for a 14-day trial to watch for free.