Ann: Investment Update - June 2023, page-3

I asked GCI - below is their answer which makes perfect sense to me

"

In short, if we use these figures as an example of a single RMBS investment structure, the RMBS will receive 6.86% of income from all the residential borrowers which it must then use part of this to pay the investors in that RMBS structure (such as GCI). RMBS are structured with different tranches, with different levels of risk with different returns, based on that level of risk. The most senior tranche (i.e least risky) typically rated AAA makes up circa 90% of an RMBS funding and investors may receive, say 4.8%. As you go down the tranches, the most junior tranche may pay say 10% return for the risk but this may only be 2% of the RMBS fund (with all other tranches in between returning between 4.8% and 10%). So overall the RMBS may pay to investors a weighted average of say 5% across all the tranches (the loan issuer retains the difference between 6.86% and 5%) but depending on which tranches you are invested in, your return can be greater than the 6.86%.

GCI do not invest in the most senior tranche – we invest down the ‘stack’ – if you refer to page 3 of the investor report, you can see that we predominately invest in the A, BBB and B credit rated tranches which can return a higher rate than the average interest rate paid by the borrowers in that RMBS, but as they only make up a small part of the RMBS funding, the issuer still makes a margin on the structure."