Which scenario is most likely to result in a competitive return to a CDO equity holder?
A The collateral earns a higher yield than the bond classes.
B The senior bond class experiences early principal repayment.
C The debt funding costs are higher than the CDO return.
Solution
A is correct. The benefit of the return on collateral in excess of what is paid out to the bond classes accrues to the equity holders and to the CDO manager.
B is incorrect because when the senior bond class experiences early principal repayment the CDO manager isn’t meeting pre-specified tests requiring the prepayment of low cost senior debt, deleveraging the CDO and making it harder for the subordinated tranche to earn a competitive return.
C is incorrect because if debt funding costs are higher than the CDO return, no return will accrue to the subordinated tranche.
请老师详细解析下B选项。
