Where Have the Interest Diversion Cushions Gone.

CLO

Due to the recent rash of defaults in the Oil & Gas sector CLO investors can expect to see significantly eroded interest diversion test cushions when reviewing upcoming April payment reports. With credits for Southcross Holdings and Templar Energy being flagged as defaulted in most CLOs over the past month they will significantly contribute to the woes across the sector. Within CLO portfolios interest diversion tests are designed as a mechanism to divert interest set to be paid out back into the deal as principal. These diverted funds help to sure up the deal and hopefully prevent overcollateralization test failures down the line. If energy sector defaults continue to rise at the rate we’ve seen throughout the first quarter July could be a pivotal payment month for the CLO market.

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