Loan Tranches Explained

Risk Vs Reward

Delegates offer a range of business lending opportunities on Kasu. Business lending opportunities are firstly segmented and categorised by broad common factors that influence risk and return (APY), such as industry sectors and/or lending asset classes. This common level of segmentation is known as a Lending Strategy.

Once a Lending Strategy is established in accordance with the above segmentation, Delegates may offer sub-segments (additional categories) of business lending opportunities within a single Lending Strategy. This occurs by structuring (or separating) a Lending Strategy into a maximum of three loan Tranches: Senior Tranche, Mezzanine Tranche and Junior Tranche.

Tranching specifically relates to Kasu Lenders' ranking priority in the capital structure for the recovery of funds in the event of losses. Each Tranche therefore offers a higher or lower APY that compensates Lenders for the higher or lower degree of risk associated with their ranking in the capital structure (i.e. lower APY for a higher ranking priority, versus higher APY for a lower ranking position).

The following example assumes a Delegate offers all three Tranches for a Lending Strategy:

• Senior Tranche: The Senior Tranche offers the lowest APY and carries the lowest risk, as it has the highest-ranking priority to claim any recovered funds (if available) across all Tranches in the event of losses. Similarly, it is the last to absorb losses.

• Mezzanine Tranche: The Mezzanine Tranche offers a higher APY than the Senior Tranche, but lower than the Junior Tranche. This is because it has the second highest-ranking priority to claim any recovered funds (if available) after the Senior Tranche. Similarly, it is the second to absorb losses (after the Junior Tranche).

• Junior Tranche: The Junior Tranche offers the highest APY, as it has the lowest-ranking priority to claim any recovered funds (if available) across all Tranches in the event of losses. Similarly, it is the first to absorb losses.

It is noted that some Delegates may only offer two Tranches, being Senior and Junior (and not Mezzanine). In such a structure, the same concepts outlined above apply in that the Junior Tranche is subordinated to the Senior Tranche in the absence of a Mezzanine Tranche. The minimum number of Tranches is therefore two. Any less is referred to as a Single Loan Offer, where no ranking priority order exists among Lenders on Kasu.

A more detailed explanation around the mechanics of losses and recoveries, and how they are applied to each Tranche, is covered in the Tranche Structuring - Loss Apportionment & Recovery of Funds Section.

Tranching also enables a Delegate to promote a wider variety of business lending opportunities with a single Lending Strategy. This may attract a wider base of Lenders with differing risk profiles. This allows Lenders to make more informed decisions around their own risk appetites.

Unlike the debt hierarchy (ranking priority) methodology associated with Tranching in TradFi (commonly referred to as a waterfall payment structure which also applies a ranking priority to general repayments of principal and interest), Loan Tranches on Kasu only apply a ranking priority in the case of losses and recoveries (not principal repayments and interest repayments). I.e. all loan Tranches on Kasu have equal ranking to principal repayments and interest earnings (assuming no losses or defaults). Similarly, all loan Tranches on Kasu also have equal ranking to Withdrawal Requests (subject to Loyalty Levels and queuing and assuming no losses or defaults).

Accessing Kasu Tranches

Lenders can select their desired Tranche during the Lending Request process. However, should a particular Tranche be oversubscribed, then a Lender's funds will be automatically reallocated to the next available Tranche with higher ranking priority and lower APY.

In order for Lenders to optimise the chances of their Lending Requests being accepted into their desired Tranche, Lenders can achieve a Kasu Loyalty Level by purchasing and locking a minimum amount of $KSU tokens for a minimum period. This is fully detailed in The Role of the KSU Token Section.

By understanding Kasu's loan Tranche structuring, you can create a lending portfolio that balances potential returns with your personal risk tolerance. Please refer to the 'Risk Disclosure: Senior, Mezzanine and Junior Tranches' in the Important Information Section for a detailed risk explanation.