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The failure of a 2014 CLO to pass its overcollateralisation (OC) test last week has put the spotlight back on underlying credit quality in US CLOs, even as the market retraces much of the widening in spreads that has taken place in 2016.
Investors said they grew concerned last week after a 2014 CLO from GLG Silvermine postponed payments on equity and its junior-most debt tranche after failing an OC test.
According to Nomura analysts the deal is the first of the CLO 2.0 class to have to miss equity and junior debt payments after failing the OC test.
A failure cuts off excess spread cash flows to equity, and can also cause deferrals of interest on junior and mezzanine notes.This in turn alters the credit quality of the affected notes.
According to Moody's Investor Services, 15% of CLO 2.0s that it rates would fail their junior OC tests,...