First pay

The first-pay bond of a CDO or other securitisation is the tranche that has the first right to receive income to make coupon and principal payments. Typically, first-pay tranches are rated triple A. However, not all triple A tranches are the most senior notes in the capital structure. This distinction becomes important when there is significant deterioration in the quality of the underlying assets. The first-pay tranche will often be more valuable than other tranches since it has greater entitlement to the income and also because its holders often have the right to accelerate or liquidate the transaction.