Page 68 - FINAL CFA SLIDES DECEMBER 2018 DAY 14

LOS 53.c: Describe typical structures of
securitizations, including credit tranching and Session Unit 15:
time tranching., p.77 53. Introduction To Asset-Backed Securities

Securitizations may involve multiple classes of securities, called tranches, each with a different claim to the

cash flows of the underlying assets. With this structure, a particular risk of the ABS securities is
redistributed across the tranches.

Credit tranching –based on different exposures to the risk of default of the assets underlying the ABS. With
this structure, also called a senior/subordinated structure, the subordinated tranches absorb credit losses
as they occur (up to their principal values).

•
Protected from losses below 110 million in principal
tanties
(highest credit rating) and hence has lowest yield!
•
For losses between $30 - 110 million in principal.

• Tranche B is first-loss tranche –for defaults of up to $30
million in principal.
• Called waterfall structure because in liquidation,

each subordinated tranche would receive only the
“overflow” from the more senior tranche(s) if they
are repaid their principal value in full.

Time tranching, the 1st (sequential) tranche receives all principal repayments from the underlying assets up

to the principal value of the tranche. The second tranche would then receive all principal repayments from
the underlying assets until the principal value of this tranche is paid off. There may be other tranches with
sequential claims to remaining principal repayments.