What is Tranche‑based approach ?
“Tranche‑based approach” generally means splitting a pool of cash flows, funding, or risk into layers (“tranches”) that have different priorities, risk/return profiles, and rules for how they get paid or funded. It’s widely used in structured finance , project/program funding , and credit risk management . Below is a clear, practical breakdown—pick the context that fits your work best. 1) Structured Finance / Securitization (ABS/MBS/CLO/CDO) Core idea: Pool many assets (e.g., loans), then issue securities in tranches : Senior tranche (AAA) – lowest risk, paid first in the waterfall Mezzanine tranche (A–BBB) – mid risk, paid after senior Equity/Jr tranche – highest risk, paid last ; absorbs first losses Cash-flow waterfall (simplified): Collect interest + principal from the underlying pool. Pay fees/servicer. Pay senior interest & principal (until target balance). Pay mezzanine interest & principal. Pay equity remainder (if any). Benefits: Tailors securities to differ...