Cash Flow Waterfall

The contractual priority of payment sequence in a securitisation. Standard structure: senior expenses → senior interest → OC test → junior interest → reserve replenishment → equity distributions.

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%.

Sequential Pay

A principal waterfall in which all available principal is applied to the most senior outstanding tranche until fully repaid before any proceeds flow to junior tranches. Standard during amortisation and post-trigger periods.

Excess Spread Trap

The capture of excess spread to cure an OC or IC test deficiency. Standard mechanic: trap 50% of remaining interest proceeds (or the exact amount needed to cure, whichever is less) and redirect to senior principal.