First, the senior tranche would get its principal plus target interest, then junior would get its principal plus target interest and then equity would get the rest. So basically the equity tranche will absorb most of the performance-based volatility, while the junior tranche will be absorbing default losses if the total losses are going to be larger than the equity tranche.
Important to notice is that in the Open and the Closed states, the portfolio consists only of cash, which means that there are no assumptions about future performance of currently deployed capital, but it’s only a way of calculating how to split the cash between different lenders.
See a few examples below:
