Important Disclosure. For professional counterparties only. Informational content. Not a public offer. Any mandate is subject to underwriting, KYC/AML, sanctions screening, conflicts checks, and definitive documentation.
Senior vs Mezzanine vs Junior Tranches In Trade Finance
Trade finance is not a single loan.
It is a capital stack where different layers absorb different risks.
These layers are called tranches.
Understanding how senior, mezzanine, and junior tranches work explains why some transactions attract low-cost capital while others only clear at expensive pricing or fail altogether.
What A Tranche Actually Represents
A tranche is a defined slice of a transaction’s risk and repayment priority.
Each tranche has:
- A ranking in the payment waterfall
- A defined collateral claim
- Its own pricing
- Its own control rights
The more protected the tranche, the cheaper the capital.
The Capital Stack Concept
| Layer | Risk Position | Typical Pricing Range | Main Function |
|---|---|---|---|
| Senior Tranche | Lowest risk | Lowest | Funds core controlled assets |
| Mezzanine Tranche | Middle risk | Mid | Bridges leverage gaps |
| Junior Tranche | Highest risk | Highest | First-loss / growth layer |
Senior Tranche
The senior tranche sits at the top of the repayment waterfall.
Senior lenders expect to be repaid first from controlled cash flows or liquidation of collateral.
What Senior Lenders Require
- Direct pledge over inventory or receivables
- Independent collateral management or inspection
- Controlled bank accounts
- Low advance rates
- Tight covenants
What Senior Tranches Typically Fund
- Eligible inventory
- Eligible receivables
- Confirmed offtake-backed shipments
Senior capital is cheap only when controls are strong.
Weak controls push risk into mezzanine or junior layers.
Mezzanine Tranche
The mezzanine tranche sits below senior but above junior.
It absorbs losses after senior protections are exhausted.
Why Mezzanine Exists
- Senior lenders cap leverage
- Sponsors want higher funding levels
- Collateral is good but not perfect
What Mezzanine Lenders Focus On
- Residual collateral value
- Transaction margins
- Operational track record
- Alignment of sponsor equity
Mezzanine pricing is materially higher than senior because repayment depends on performance, not only collateral liquidation.
Junior Tranche
The junior tranche is the first-loss layer.
It absorbs losses before mezzanine and senior.
Common Sources Of Junior Capital
- Sponsor equity
- Special situations funds
- High-yield private credit
Why Junior Capital Exists
- Early-stage trading platforms
- New counterparties
- Higher volatility commodities
Junior tranches are expensive but unlock the rest of the capital stack.
How Tranches Are Engineered
- Define collateral pools
- Set advance rates
- Design cash waterfall
- Assign control points
- Stress downside cases
The goal is always to push as much capital as possible into the senior tranche.
Common Mistakes
- Trying to force everything into senior
- Ignoring control infrastructure
- Overestimating collateral liquidity
- Underpricing operational risk
Where FG Capital Advisors Fits
FG Capital Advisors structures and places multi-tranche trade finance facilities with private credit and institutional lenders.
We focus on building lender-grade capital stacks and managing distribution and decisioning.
You can review our trade finance distribution approach at: Trade Finance Distribution Advisory Services
Disclaimer. Best-efforts execution. No guarantees of funding, pricing, or closing.
