Cash flow waterfall priority
Asset-Backed Securities glossary · Cash Flow Waterfalls & Triggers
Definition
Standard waterfall ordering: trust expenses → senior interest → senior principal → mezzanine interest → mezzanine principal → subordinate interest → subordinate principal → residual.
Cash flow waterfall priority in plain English
When a pool of loans sends money into a deal, that cash doesn't get split randomly — it flows down a strict list of who gets paid first, like water filling a stack of buckets from the top. First the deal pays its running costs, then it pays interest and then principal to the safest investors (senior), then the same for the middle group (mezzanine), then the riskier group (subordinate), and whatever is left over at the very bottom goes to the deal's owner (the residual). The whole point is that the people who took the least risk get paid before anyone below them, so if money runs short, it's the bottom buckets that go empty first.
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