Q in part2: Trust Account & Equity Tranche

Hi All,

In securitization, should Equity tranche get money ahead of trust of account (if there is residual) or after trust account.

This Q is related to topic 25 in book2. (Malze Ch9)

Equity is first.

  1. Say there is $20mm in residual after the senior and mezz tranches are paid and that the maximum to be paid to the equity tranche in a given year is $15mm, then $15mm will go to the equity tranche and $5mm will be diverted to the trust.

  2. Say there is $10mm in residual after the senior and mezz tranches are paid and that the maximum to be paid to the equity tranche in a given year is $15mm, then $10mm will go to the equity tranche and $0mm will be diverted to the trust.

I was also waiting for this reverts since I was confused because of question that how trust account is coming in picture. BTW thanks to Dwheats

There are only three rewardees > Senior Tranche > Mezz > Equity rest. If anything is left then it will go to Firm/Trust/Institution etc.

We have to distribute funds in order of thr nature. Senior tranche carries lowest risk then medium risk carried by Mezz tranche and highly risky is Equity tranche.

Now my question is how far Trust is owner of residual (money left after giving principal to equity)? Equity should get entire funds…May be it will be on discretion of equity to allow funds getting transferred to Trust as reserve. Please correct me if I am wrong…

Hi Maged…

I just finished said reading; I am trying to explain your query in two cases below:

Case 1: Trust not approached to final year or termination year > the commitment towards senior tranche will be given first then comes the Mezz and later equity. The equity will receive only after creating reserve or surplus in trust account, this amount will be given in problem. Sometimes problem mention how much to transfer to equity and balance to trust account or vice versa. Basically these terms depends on terms and condition to which senior and junior tranches agree upon with equity holders. The purpose to transfer in trust account as reserve is to meet commitments towards the senior tranches in bad times or crisis.

Case 2: Trust in maturity / terminal year then, simply follow the waterfall. First pay senior tranche then Mezz and later entirely to equity (residual).

Thanks all

On checking what is mentioned in reading 36 (Choudhry chapter 12), it’s different

Full payment could be switched to pay principles for all tranches in case of insufficient fund to pay senior interest. That’s totally different from what’s mentioned in reading 25

I’m referring to page 260 in Schweser B2

Sorry, do not agree. Not sure what structure of securitisation is being talked about. There is no difference between equity and the residual tranche. A trust , to my understanding is a mediating body and control body, if you may like. Other than executing the administrative duties, protecting structure’s interest the trust cannot have any interest of it’s own. If there is an OC account held by trust, then that treatment is not known to me. There cannot be any fixed amount passed to the residual tranche either. The purpose of bearing the riskiest piece is not to receive a fixed amount. That is conceptually wrong. I think, where there may b confusion is the fact that the trust fees are paid first. It is administrative charge which needs to be paid before any interest holders can be paid. So it is better not to confuse this with the yiel of trust. The trust cannot have any providential interest in the structure.