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Answer: GBP 250,000
The correct answer is C. The CLO has a pool of 50 identical loans, each priced at GBP 1 million, and the underlying loans are floating-rate obligations that pay a fixed spread of 150 bps over LIBOR. The annual excess spread is limited to GBP 250,000. With LIBOR at 4% in the first year, the inflows from the loans are GBP 2,750,000. The outflows to the senior and mezzanine tranches are GBP 1,668,750 and GBP 700,000, respectively. The excess spread is GBP 381,250. However, the amount posted to the overcollateralization account is limited to GBP 250,000, so the remaining GBP 131,250 is posted to the equity tranche.
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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 |
|---|---|
A
GBP 0
B
GBP 0
C
GBP 250,000
D
GBP 381,250
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