Term used primarily in connection with certain tradable financial instruments. Banks bundle a large number of issued loans into a portfolio. This is then broken down into individual tranches; usually into three, not necessarily equal parts. – The lowest, relatively high-interest tranche (first-loss piece, also known as equity tranche) must fully bear (absorb) the loss resulting from a default of a loan in the overall portfolio. – The next-higher tranche (mezzanine tranche) only has to absorb losses if the loan defaults exceed the volume of the first-loss tranche. Its risk is therefore lower, and so is the return on this tranche. – Further, increasingly lower-risk tranches follow in the same pattern. – See credit enhancement, call, hybrid capital, originate-to-distribute strategy, reintermediation, repatriation option, repayment, early, tranche thickness, securitization, securitization structure, true sale securitization, waterfall principle. – Cf. Deutsche Bundesbank Monthly Report of April 2007, p. 16 f. (overview of the financing structure in a typical leveraged buyout and position of mezzanine creditors).
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