What is a tranche in finance?

A tranche is a class of securities within a financing, with its own payment rights and exposure to losses. Several tranches can draw cash from the same pool of mortgages, corporate loans or other assets. The deal documents determine who gets paid, when, and what happens if the pool falls short.

“Tranche” is French for “slice.” The useful question is what has been divided: payment priority, maturity, interest entitlement or credit risk. Two securities backed by the same loans can behave very differently.

Senior, mezzanine and equity tranches

A simple credit structure has three layers:

These labels do not specify a bond's rating or guarantee repayment. The Federal Reserve's explanation of CLO structures describes how a loan portfolio can fund rated debt and an unrated residual interest.

A $100 million payment example

Assume a hypothetical pool is financed by $80 million of senior debt, $15 million of mezzanine debt and $5 million of equity. For one annual payment period:

• The senior debt owes 5% interest, or $4 million.
• The mezzanine debt owes 8% interest, or $1.2 million.
• The pool has $7 million available after fees and expenses.
• No principal is due in this period, no reserve must be topped up, and no coverage test diverts cash.

The assumed interest waterfall pays $4 million to senior debt, then $1.2 million to mezzanine debt. Equity receives the remaining $1.8 million.

If available cash falls to $4.5 million, senior interest is still paid in full, mezzanine receives $500,000 against $1.2 million due, and equity receives nothing. Whether the unpaid $700,000 accrues, is deferred or triggers a default depends on the documents.

Payment priority does not necessarily mean all senior principal must be repaid before junior interest can be paid. Transactions can have separate interest and principal waterfalls, reinvestment periods, reserve requirements and tests that redirect cash. The example above specifies one interest period, not the full life of a deal.

How losses reach each tranche

Now use the same capital structure to illustrate final principal losses. Assume losses are allocated from the bottom up, with no excess spread, guarantees or other protection. These are alternative scenarios, not successive periods.

At $8 million of pool losses, the pool has lost 8% of its original principal. Equity has lost 100% of its $5 million and mezzanine has lost 20% of its $15 million. Senior has no principal loss under these assumptions, although its market price could still fall.

The senior tranche's initial subordinate protection is $20 million, or 20% of the original pool. That percentage can change as balances amortize, collateral deteriorates or cash is redirected. Tranching allocates risk; it does not remove the pool's losses.

Bring source documents to a real tranche question

A real analysis needs the class terms and payment rules, plus the collateral and distribution information for the period being studied. A pool's average DSCR or delinquency rate cannot establish a particular bond's interest payment.

For example, Benchmark 2020-B16 Mortgage Trust has both a 10-D filed October 30, 2026 and an ABS-EE filed the same day. The former is a distribution-report filing; the latter contains asset-level information. They serve different parts of the investigation. The offering documents supply the contractual waterfall.

That filing lookup was checked on November 12, 2026. The retrieved index is a source-finding aid; gaps in it do not prove a filing does not exist. A bond-level waterfall still needs the relevant documents and assumptions.

For the collateral side of the comparison, read CLO vs CDO or the eight examples of asset-backed securities.