Exclusion of Excess Par Obligations from Collateral Quality Tests

The concept of "excess par obligations" was once a standard CLO provision, typically capped at a low single-digit percentage. Today, most transactions are priced without it — and we believe for good reasons.

Three structural concerns drive this trend. Designation is left entirely to the Collateral Manager's discretion, creating uncertainty. Most critically, excess par obligations are excluded from all Collateral Quality Tests — meaning WARF, Recovery Rate, WAS, and WAL metrics no longer reflect the full collateral pool, potentially distorting values in either direction. 

Transactions without this feature offer a cleaner analytical picture: all quality tests apply to the full universe of Eligible Obligations, improving transparency and comparability across the market. It is worth asking, however, whether there are scenarios in which an investor might still favour the inclusion of this concept.

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