Fair loss piece (FLP) is a type of securitization security that absorbs losses on the underlying assets before other securities in the securitization. FLPs are often used to protect investors in the securitization from losses in the event of default on the underlying assets.
FLPs are typically structured as tranches, with the FLP being the lowest-ranking tranche. This means that the FLP will absorb losses on the underlying assets before any other tranche. If the losses on the underlying assets exceed the amount of the FLP, then the other tranches will not be affected.
FLPs are a relatively new type of securitization security, but they have become increasingly popular in recent years. This is because they provide a way to protect investors from losses in the event of default on the underlying assets.
Here are some applications of FLPs in securitization:
- Protecting investors from losses: FLPs can be used to protect investors from losses in the event of default on the underlying assets. This is because the FLP will absorb losses on the underlying assets before any other tranche.
- Managing risk: FLPs can be used to manage risk in a securitization. By absorbing losses on the underlying assets, the FLP can help to reduce the risk of losses for other tranches in the securitization.
- Raising capital: FLPs can be used to raise capital for a securitization. By selling FLPs, the originator of the securitization can raise money to fund the securitization.