CMA Final · Strategic Financial Management · Securitization
A securitized pool of Rs 200 crore is structured with a senior tranche of Rs 150 crore, a mezzanine tranche of Rs 30 crore and an equity (first-loss) tranche of Rs 20 crore. If the pool suffers credit losses of Rs 42 crore, how much loss does the mezzanine tranche bear?
The mezzanine tranche bears Rs 22 crore. Losses first exhaust the Rs 20 crore first-loss equity tranche. The remaining Rs 22 crore is less than the mezzanine size of Rs 30 crore, so the mezzanine absorbs it all and the senior tranche is untouched.
- ARs 22 crore
- BRs 30 crore
- CRs 12 croreCorrect
- DRs 0
Explanation
Losses are absorbed from the bottom. The equity tranche takes the first Rs 20 crore. The remaining Rs 22 crore goes to the mezzanine tranche, which can absorb at most Rs 30 crore, so it bears Rs 22 crore. Correction: mezzanine loss = 42 - 20 = Rs 22 crore, not Rs 12 crore.
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