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A waterfall structure in a securitized bond issue:

A gives some bondholders a higher priority of claims than others.

In a securitized bond issue with a waterfall structure, the bonds are issued in tranches with varying levels of seniority. Any losses arising from the underlying assets are absorbed first by the tranches with the lowest seniority. Thus, tranches have different levels of default risk and therefore are likely to have different credit ratings. The structure is a form of internal credit enhancement.