Senior-sub structure
Asset-Backed Securities glossary · Cash Flow Waterfalls & Triggers
Definition
A capital structure with senior tranches protected by subordinate tranches that absorb losses first; the workhorse structure of US ABS.
Senior-sub structure in plain English
When a company bundles up loans (like car loans or credit-card debt) and sells slices of the income to investors, the slices aren't all equal. In a senior-sub structure, the 'senior' slice sits at the front of the line and the 'subordinate' slices sit behind it, agreeing to eat any losses first if borrowers don't pay. Picture a stadium where the lower rows flood first in a storm, keeping the upper deck dry — the subordinate tranches soak up the damage so the senior tranche stays safe. This is the workhorse design for US asset-backed bonds because it makes the senior slice very safe (and cheap to fund) while the risk-takers below earn more for the danger.
Learn these first
Practice Senior-sub structure
What is the typical purpose of 'First-Priority' principal in a senior-sub structure?
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