![]() ![]() ![]() Hence, the cost should be the same as the cost of originator’s equity. For economic purposes, it is nothing but originator’s equity. The cost of the unrated or equity tranche for regulatory purposes is deduction from equity. The difference in the weighted average costs with and without the mezzanine tranche is illustrated below: ![]() In absence of the second loss piece, the unrated lower tranche or the equity tranche has to be 11%. On the other hand, if for BBB rating, the support required is 8% and at AAA, the support required is 11%, then 3% is the second loss piece. In absence of a mezzanine tranche, the weighted average cost would be high. In a 2 tranche transaction both the first loss and the second loss support is provided by the equity tranche which is held by the originator.Īssume a case, where the support required for an AAA rating is 11%, which is provided by the equity tranche. As there is no mezzanine tranche, and the senior tranche still expects a AAA or similar rating, the total level of support required for the senior tranche is the total of the (first loss piece + second loss piece). To explain further, consider a transaction with only 2 tranches – a senior tranche and a junior tranche, as it currently is the practice in India. Ideally the role of a mezzanine tranche is to be able to reduce the weighted average cost of the asset-backed securities issued. The mezzanine tranche, is normally defined as the piece above an investment grade rating – that is, if the transaction was putatively to be rated BBB, what would have been the support required. What is a mezzanine tranche?Ī mezzanine tranche is a small layer positioned between the senior tranche (mostly AAA) and a junior tranche (unrated, typically called equity tranche). This article tries to articulate on the relevance of mezzanine tranche in the securitization market that is on an upswing currently. By Nidhi Bothra, ( a securitization market matures, one of the surest things that should emerge is the market for mezzanine tranches. ![]()
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