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Equity/First loss tranche - Meaning

The most junior tranche in a structured finance transaction. This tranche is usually kept by the originator (as an equity tranche) and covers the risk of first loss in a portfolio. Its size is a function of historical losses, so as to protect investors against the economic risk (estimated loss) of the transaction. Also, the riskiest tranche in a Collateralised Debt Obligation (CDO) where there is no subordination, as it is the first to face any losses.

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