A tranche that comes with the lowest priority amongst the entire set of tranches constituting a securitized structure (CMBS structure, CMO structure, CDO structure, etc.)
Losses that may arise from defaults on underlying debt/ loans will be charged against the principal balance of such a tranche that stands poised to firstly absorb losses.
Each tranche in a securitized structure carries its own risks, rewards and maturities that allow investors to choose the tranche that better reflects, and corresponds to, their investment objectives. The first-loss piece/ tranche has the lowest priority in relation to any claims for repayment against the underlying collateral. As such, it is considered a junior tranche, where it is set to first absorb losses in the case of default.
A first-loss piece is also referred to as an equity tranche or a residual tranche.
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