tranche

Tranche is a French term meaning slice or portion. In finance, it denotes a distinct segment of a pooled financial instrument or of a loan that has specific rights, risks, and rewards.

In securitization and structured finance, a single pool of assets (such as mortgages or loans) is divided into multiple tranches. Each tranche has its own maturity, coupon, and priority in the payment waterfall. Senior tranches are first in line to receive interest and principal and typically carry lower risk and higher credit ratings. Mezzanine or junior tranches absorb more risk and offer higher yields. An equity or residual tranche bears the greatest credit risk and receives whatever remains after other tranches are paid. Cash flows are allocated from the pool to tranches in order of seniority, and losses are also absorbed by tranches from the bottom up.

In other contexts, the term describes financing that is provided in stages. Tranche financing releases funds in parts as milestones, performance targets, or covenants are met, rather than as a single lump sum. This approach is common in project finance, private equity deals, and large corporate loans, and it can affect interest rates and covenants.

The use of tranches allows risk to be distributed and for investors to select exposures that fit their risk tolerance. However, tranches can complicate pricing and valuation and were implicated in opaque risk during past financial crises.