Leveraged super senior

A leveraged super senior is a synthetic CDO in which the investor has exposure to the entire super senior tranche but where the initial investment amount is only a small proportion of the tranche notional.

Leveraged super seniors allow dealers to sell risk at the most senior part of the capital structure, for which there has historically been little demand, by transforming super senior tranches into investments that pay spreads comparable to triple A tranches.

The initial leverage – the ratio of the tranche notional to the initial investment amount – is usually between 10 and 20 times. However, the leverage can be reduced – with the investor required to increase the size of the investment – if certain triggers are breached. These triggers are intended as an indication of deterioration in the market value of the tranche (from the point of view of the investor).

Usually, these triggers are either, or some combination of, losses in the portfolio or spread widening in the portfolio. In other words, the investment amount in a leveraged super senior is akin to margin. And investors face the risk of a margin call long before they are directly affected by losses in the portfolio.