Why Equity Tranche increases its value when correlation Increases ?
The value of equity tranche dependes positively on the level of default correlation . The higher the default correlation in the reference portfolio , the higher the value of an investment in the equity tranche which means that the spread associated with it will be lower.
Still not clear
See if this helps, Schweser notes try to explain this through the perspective of a credit risk buyer. Credit risk buyer would rather see a few uncorrelated default thus if correlation is low the senior tranche woudl have more value. But if correlation is high then the expected loss on senior tranche would be higher, and combing with the Merton theory, equity tranche’s value would increase.