Tranche

What is Tranche?

Tranches refer to segments or portions of a larger financial product, such as loans, bonds, or securities, that are divided based on risk, return, or maturity. The term originates from the French word for "slice," and each tranche represents a different level of risk and reward, allowing investors to choose based on their risk appetite and investment goals.

Common Uses of Tranche in India

• Mortgage-Backed Securities (MBS): Indian housing finance companies pool home loans and divide them into tranches, catering to different risk appetites.
• Corporate Bonds: Companies issue bonds in multiple tranches, each with varying interest rates and maturity periods.
• Infrastructure Bonds: Large infrastructure projects may be funded in tranches to align with different project phases.

Types of Tranche

Senior Tranche:

Risk: Lowest.
Return: Lower.
Priority: First to receive payments and least affected by defaults.

Mezzanine Tranche:

Risk: Moderate.
Return: Higher than senior tranches.
Priority: Paid after senior tranches but before junior tranches.

Junior/Equity Tranche:

Risk: Highest.
Return: Potentially the highest.
Priority: Last to receive payments; absorbs initial losses.

Example of Tranche in India

A non-banking financial company (NBFC) issues ₹500 crore in corporate bonds to fund renewable energy projects. These bonds are divided into:

• Senior Tranche (₹300 crore): Low-risk, offering a 6% return.
• Mezzanine Tranche (₹150 crore): Moderate risk, offering an 8% return.
• Junior Tranche (₹50 crore): High-risk, offering a potential 12% return.