Note on covenants after reinvestment period

In this note, I would like to summarize the main covenants after the reinvestment period.
Prepayment features differ under the covenants after the reinvestment period which derive the performance after the end of reinvestment period. Stricter covenants CLO will likely to be gradually amortized after the end of reinvestment period while looser covenants hold higher convexity i.e. reinvestment of collaterals will be more likely to be reinvested (WAL will be longer). Under the wider period of credit spreads, more opportunity to enhance the return for equity tranche investors, looser covenants CLOs have unlikely to be amortized. 
 
OC Test:
OC test is ratio of collateral value vs its notional of collateral and senior tranche. OC Test is divided into 2types. One is to value the collateral with market value basis and another is to value the collateral with notional basis which is called par value type. However, for par value type, if all of the collateral is valued based on par value, then it will underestimate the credit risk if the market valuation is lower than notional. Adjustments are based on below:
- Excess CCC:
If weight of CCC is above from predefined threshold, then basis of above exposure is market value basis.
- Discount Obligation:
Discounted value loan which discount is above certain threshold, then it is counted on market value basis.
It is good to know the reinvestment of collaterals are able whether to "Satisfy" or "Maintain or Improve" the OC test. If "Maintain or Improve" is applicable, then even condition to reinvestment of collateral is not satisfied but reinvestment is available if OC ratio is maintained or improved. Therefore, if reinvestment constrains contain "Maintain or Improve" clause, repayment is more unlikely than "Satisfy" constrain only.

Collateral Quality Test:
- Interest Coverage Test:
It is test that how much the total interest payment of one tranche and its superior tranches are covered by the revenue of the vehicle.

If these tests fail, collateral cannot be reinvested and CLOs are gradually amortized.