How does a TAC tranche differ from a PAC, and what protection do you actually get?

Question

AcadiFi · Accepted Answer

A Targeted Amortization Class (TAC) is a simpler cousin of the PAC: it targets a principal schedule at a single prepayment speed rather than across a two-sided band. The result is asymmetric protection.

Construction: suppose Welland TAC-1 targets 165 PSA. The tranche pays on schedule at exactly that speed and is protected against faster prepayments (contraction protection) — any excess principal is redirected to a support tranche. But if prepayments fall below 165 PSA, there is no lower-band cushion, and the TAC extends along with the pool.

So the protection is one-sided:

- Above 165 PSA: TAC stays on schedule, support absorbs excess.
- Below 165 PSA: TAC extends just like a sequential.

Vs a PAC (100-250 collar), the TAC is cheaper to structure (less support collateral needed) and therefore offers a slightly higher yield, but investors sacrifice extension protection. TACs are attractive when a manager expects prepay speeds to stay at or above the target and mostly fears refinance waves, not rate backups.

```mermaid
flowchart TB
  Fast[Fast prepay] -->|absorbed| Sup[Support]
  Fast -.-> TAC
  Slow[Slow prepay] --> TAC[TAC extends]
```

Rule of thumb: PAC = both-sided insurance; TAC = contraction-only insurance; Sequential = no insurance. Price reflects the coverage.

How does a TAC tranche differ from a PAC, and what protection do you actually get?

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