A mezzanine tranche is a class of notes that ranks in the middle of the capital structure of a securitisation. Losses on the underlying pool of loans are borne first by the equity tranche; only when that is used up do they reduce the mezzanine notes, and only when those are exhausted do they reach the senior tranche. Cash collected from the pool is paid in the opposite order, with senior noteholders paid first under the securitisation waterfall.
Because it sits between the two, a mezzanine tranche carries a lower credit rating and a higher coupon than the senior notes, typically in the range from single-A down to double-B. It is thin relative to the pool, so a modest rise in defaults can cause a large proportional loss. Buyers include insurers, credit funds and hedge funds. The process of dividing risk in this way is described under tranching.