The parties to a securitization transaction:
The SPV is a bankruptcy-remote vehicle that plays a pivotal role in the securitization process. It issues securities backed by the underlying assets. The underlying assets are used as collateral for the securities. Cash flows generated from the underlying assets are used to service the debt obligations on the securities.
The SPV separates the assets used as collateral from the corporation seeking financing.
Prepayment tranching refers to dividing cash flows from securitized assets among different classes of securities so that some receive repayment of principal before others. It is used to reallocate the prepayment risk of the underlying loans among different classes of securities. In the simplest cases, a deal might offer several classes of serially maturing securities. Some investors might prefer the securities with shorter maturities while others might favor the ones with longer maturities. Collateralized mortgage obligations (CMOs) are the most ubiquitous examples of time tranching.
Credit tranching refers to the creation of a multi-layered capital structure that includes senior and subordinated tranches (classes). The structure is designed so that any losses caused by defaults will be passed on to the subordinated tranches first. Credit tranching is thus used to reallocate the credit risk associated with the collateral.