Credit Enhancement

Structural mechanisms that improve the credit quality of notes issued by an SPV, protecting noteholders from losses. Can be internal (OC, excess spread, subordination, reserve accounts) or external (letters of credit, guarantees, insurance wraps).

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.

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%.

Reserve Account

A cash account funded at closing that provides a liquidity and credit buffer. Typically sized at 0.5–2% of initial pool balance; replenished from excess spread after other waterfall payments.