OC Test (Over-Collateralisation Test)

Formula: OC Ratio = Performing Asset Par / Outstanding Note Balance. Failure redirects excess interest proceeds to repay senior notes (turbo). CLO Class A/B OC test minimum typically 121–128%.

IC Test (Interest Coverage Test)

Formula: IC Ratio = Available Interest Income / Required Interest Payments. Failure traps cash before equity distributions. Typical CLO IC minimum ~120%.

Excess Spread

The difference between interest received on the asset pool and interest paid on issued notes plus fees. The first line of defence absorbing losses; captured in the spread account before OC tests apply.

Principal Deficiency Ledger (PDL)

An accounting mechanism recording the running total of principal losses. When a default occurs, it is debited from the PDL; when excess spread cures it, it is credited. Common in RMBS and CLOs.