Tranche

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In structured finance the word tranche (sometimes traunche) refers to one of several related securitized bonds offered as part of the same deal. The word tranche is French for slice; in the financial sense of the word, each bond is a slice of the deal's risk. The legal documents (see indenture) usually refer to the tranches as "classes" of notes identified by letter (e.g. the Class A, Class B, Class C securities).

All the tranches together make up what is referred to as the deal's capital structure or liability structure. They are generally paid sequentially from the most senior (usually Senior Secured) to most subordinate (generally unsecured), although certain tranches with the same security may be paid pari passu. The more senior rated tranches generally have higher ratings than the lower rated tranches. For example, senior tranches may be rated AAA, AA or A, while a junior, unsecured tranche may be rated BB. However, ratings can fluctuate after the debt is issued and even senior tranches could be rated below investment grade (less than BBB). 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 moneys flow down).

Tranches with a first lien on the assets of the asset pool are referred to as "senior tranches" and are generally safer investments. The natural buyers of these types of securities tend to be conduits, insurance companies, pension funds and other risk averse investors.

Tranches with either a second lien or no lien are often referred to as "junior notes". These are more risky investments because they are not secured by specific assets. The natural buyers of these securities tend to be hedge funds and other investors seeking higher risk/return profiles.

One must be very careful investing in structured products. As shown above, tranches from the same offering have different risk, reward, and/or maturity characteristics.