Financial Risk Manager Part 2
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A CLO (Collateralized Loan Obligation) manager is assessing the performance of a CLO that contains 50 identical loans, each loan having a value of GBP 1 million. These loans are floating-rate loans and offer a fixed spread of 150 basis points over LIBOR (London Interbank Offered Rate). The liabilities of the CLO are structured to have annual coupon payments as detailed below:
| Liabilities | Amount (GBP) | Coupon |
|---|---|---|
| Senior debt | 37,500,000 | LIBOR + 45 bps |
| Mezzanine debt | 10,000,000 | LIBOR + 300 bps |
| Equity | 2,500,000 |
Initially, the CLO has no overcollateralization, and any excess spread directed toward the overcollateralization account is capped at GBP 250,000 per year. Assume that for the first year, the LIBOR rate is flat at 4%, there are no defaults within the loan pool, and there are no management or transaction fees. Based on these conditions, calculate the appropriate amounts that should be allocated to the overcollateralization account and the equity tranche by the end of the first year.
| Overcollateralization Account | Equity Tranche |
|---|---|