(Ennea) June 2012 Asset Securitisation and Tranches

Securitisation is selling the right to income to someone else and getting cash in return.

For example, there was a famous singer (David Bowie) who was getting big income each year from sales of his records. He issued bonds, and the people who bought the bonds would receive the income from his records in the future. So that meant he would no longer get the income (it would go to the people owning the bonds) but instead he got a lot of cash immediately (because the people buying the bonds were prepared to pay a lot for the right to the future income).

Tranches is where a company has borrowed money, but rather than issue bonds where everyone gets the same interest, what they might do is something like this:
Raise part of the money needed by issuing bonds paying a fixed 9% interest, and raise the rest of the money by issuing different bonds which don’t get fixed interest but get whatever is left from the income generated (so they might end up getting a lot, or they might end up getting a little).
When they money is raised in different ‘groups’ like this, then each one is called a tranche.

You are welcome 🙂