Glossary

Overcollateralization Test (OC Test)

Also known as: OC Test, Overcollateralization Ratio, OC

A CRE CLO coverage test comparing the par value of collateral loans to the balance of a given note class (and all classes senior to it); if the ratio falls below the required threshold, cash flow is diverted from subordinate classes to pay down senior notes until compliance is restored.

OC tests function as an early-warning and automatic deleveraging mechanism protecting senior noteholders from collateral deterioration — including loan defaults, extended nonperforming loans (which are typically haircut or excluded from the numerator), and rating downgrades on underlying collateral. A breach does not itself constitute an event of default; instead, the indenture's payment waterfall automatically redirects interest and principal proceeds that would otherwise flow to subordinate note classes or the equity/preferred shares, using them instead to pay down senior notes sequentially until the ratio is cured. Because OC test cushions shrink as loans season and some migrate toward nonperforming status, CRE CLO investors and managers monitor OC test headroom closely as a leading indicator of structural stress well before any actual principal loss is realized.