In a synthetic CDO, losses hit the equity, mezzanine, and senior tranches in that order. An investor who takes a tranche is in the position of selling protection on that tranche's losses, and receives a spread.
Consider a hypothetical example of a portfolio of 100 equally weighted names with a total notional of 100 billion yen and a recovery rate of 40%. Each default causes a portfolio loss of 600 million yen. The equity tranche, which covers losses of 0% to 5% (0 to 5 billion yen), loses its entire 5 billion yen notional once 9 names have defaulted.
The spread can be seen in the same example. If the equity tranche's spread is 15% a year, the seller receives 5 billion yen × 15% = 750 million yen a year while there are no losses, and loses the notional once 9 names default.
When default correlation is high, the value of the equity tranche rises and the value of the senior tranche falls.