# First loss tranche, also equity tranche and junior tranche (first loss tranche, firstloss-piece)

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- Post ID: 594169
- Modified: 2023-07-25T20:59:52+00:00
- Language: en

## Definition

In the course of a true sale securitization, a bank sells a loan portfolio to a special purpose entity established for this purpose. The latter then issues bonds in the amount of the loans taken over, thus converting the receivables into tradable securities. As a rule, these are issued in three stages. - First, in the event of default, the holders of the relatively high-interest first tranche (junior tranche, first loss pieces, FLPs) have to bear any loss; they thus assume a very high risk; to compensate for this, this tranche also bears a high interest rate compared with the other tranches. Some people also call this tranche an impact absorber or shock absorber. - The holders of the higher-interest securities of the second tranche (mezzanine tranche) are the next to be called upon to cover losses, and - the bondholders of the comparatively low-interest third part (senior tranche) of the bond are called upon to cover losses at the very end. - In principle, it is also in the interest of the lending bank to take over the first loss tranche from the special purpose entity itself. This - motivates the bank to continue to monitor the debtor and ensure that the loan is serviced and any possible collection is strictly carried out; - credibly signals to the bondholders of the mezzanine tranche and the senior tranche that everything is being done to avoid possible payment defaults (moral hazard problem!). - See back-to-originator postulate, single originator securitization, equity kicker, cash collection, hard claim, leveraged loans, originateto-distribute strategy, single master liquidity conduit, support, tacit, tranche thickness, securitization, securitization paper retention, securitization structure, waterfall principle. - Cf. BaFin Annual Report 2008, p. 55 (retention requirements). Attention: The financial encyclopedia is protected by copyright and may only be used for private purposes without express consent! University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec. Professor Dr. Eckehard Krah, Dipl.rer.pol. E-mail address: info@ekrah.com https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk https://www.jung-stilling-gesellschaft.de/merk/ https://www.gerhardmerk.de/

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