What are Tranches?
For all Asset-Backed Securities (ABS), Tranche is considered a critical aspect of the securitisation process. In the securitisation process, ABS is divided into investable tranches. These tranches are structured to distribute credit risk and assist rating agencies in identifying the risk associated with every Tranche.
Example of Tranches
Tranches are broadly defined into junior, mezzanine, and a senior tranche. Most junior tranches offer a high-interest rate but only receive cash flows after all other tranches have been paid. For this reason, most junior Tranche is sometimes referred to as the equity tranche or even toxic waste. Above the equity tranche is the mezzanine tranches, which receive payment before the junior tranches. The highest-rated Tranche, called the super senior Tranche (often rated AAA), is the safest Tranche and the first Tranche to be paid out; however, it pays investors a relatively low-interest rate.