Tranches with either a second lien or no lien are often referred to as "junior notes". Typical investors of these types of securities tend to be conduits, insurance companies, pension funds and other risk averse investors. Tranches with a first lien on the assets of the asset pool are referred to as senior tranches and are generally safer investments. The deal's indenture (its governing legal document) usually details the payment of the tranches in a section often referred to as the waterfall (because the monies flow down). However, ratings can fluctuate after the debt is issued, and even senior tranches could be rated below investment grade (less than BBB). For example, senior tranches may be rated AAA, AA or A, while a junior, unsecured tranche may be rated BB. The more senior rated tranches generally have higher bond credit ratings (ratings) than the lower rated tranches. ![]() They are generally paid sequentially from the most senior to most subordinate (and generally unsecured), although certain tranches with the same security may be paid pari passu. ![]() Use of "tranche" as a verb is limited almost exclusively to this field.Īll the tranches together make up what is referred to as the deal's capital structure or liability structure. ![]() The term tranche is used in fields of finance other than structured finance (such as in straight lending, where multi-tranche loans are commonplace), but the term's use in structured finance may be singled out as particularly important. The word tranche means a division or portion of a pool or whole and is derived from the French for 'slice', 'section', 'series', or 'portion', and is also a cognate of the English ' trench' ('ditch'). Transaction documentation (see indenture) usually defines the tranches as different "classes" of notes, each identified by letter (e.g., the Class A, Class B, Class C securities) with different bond credit ratings. In the financial sense of the word, each bond is a different slice of the deal's risk. In structured finance, a tranche is one of a number of related securities offered as part of the same transaction.
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