Tranche-Level Risk Considerations
The below dashboard illustrates how small changes in a project’s capital stack, specifically the amounts of debt senior and subordinate to a mezzanine tranche, can significantly affect its expected return. Not all mezzanine tranches of equal size carry the same risk.
For example, a tranche occupying 60 to 75% of the capital stack has an expected shortfall of 0.21% per annum, while one occupying 75 to 90% has a shortfall of 7.77% per annum, over 37 times higher. This highlights the sensitivity of mezzanine returns to tranche position and the importance of tranche-level analysis in high-yield lending.
Users can adjust the values of kα, σα, rf, γ, and δ to explore how changes in assumptions affect tranche-level shortfall.
These analyses are intended solely for academic purposes. No warranty or representation is made with regard to their accuracy.