An equity tranche is the lowest-ranking slice of a securitisation or structured credit transaction. It is also called the first-loss piece, residual or junior tranche. Through tranching, the cash flows from a pool of loans are divided into classes with different priority. The equity tranche stands last: any losses on the pool reduce it before they touch the mezzanine tranche or the senior tranche. It usually carries no credit rating and no fixed coupon.
In return for this risk, equity holders receive the residual cash left after interest, fees and principal due on the other classes have been paid under the securitisation waterfall, which in good times includes the excess spread. The tranche is often kept by the originator or sponsor, partly to meet risk retention rules, or sold to hedge funds and specialist investors. In a collateralised loan obligation, equity investors typically control the right to call the deal.