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a semi-annual paying asset in a quarterly-paying liabilities CDO transaction), and PIK securities. Each of these assets is treated generally in the following sections.
PIK securities pose an interesting concern for a CDO transaction because there is no guarantee that these assets will resume current interest payments in cash or will repay the interest that has been deferred and capitalized and the interest due on such deferred interest.
For the purpose of the interest coverage test, the interest due on PIK securities is excluded from the interest coverage test once a payment of interest has been deferred.
For the purpose of the par value test, the PIK securities are treated in a special manner.
In addition, if the percentage of PIK securities within a CDO transaction exceeds 5%, it is likely that Standard & Poor's will request that the excess of the 5% of these securities be subjected to additional liquidity stresses to demonstrate the transaction's ability to pay timely interest on the rated liabilities.
A special consideration is given to PIK securities within a CDO of CDOs transaetion, where a great percentage (up to 100%) of the underlying assets may pay ha kind.