What is structured finance?
There are ‘normal’ or ‘vanilla’ types of financing a transaction, which are widely available on the market – such as mortgages or overdrafts. These usually look at the credit strength of the borrower and value advanced vs balance sheet or asset value. However, there are ways in which finance can flow into a company or special purpose vehicle, which may be structured in an alternative way in order to provide comfort to a lender. Structured finance is a series of complex financial instruments that are offered to unique borrowers – usually where growth in a business or cycles are a little more sophisticated. Structured finance is sometimes perceived as the packaging up of receivables or finance into investment vehicles such as Collaterized Debt Obligations (CDOs). However, when we usually look at structured finance – it is in relation to lending (not packaging up debt) via structures to borrowers.
This type of finance differs as it is usually a highly involved financial instrument that is offered to large corporate or financial institution, which has a complex financing need and differs to conventional financial products. The aim is to create situations in order to provide non-flow financing solutions and structured risk mitigation products for clients when looking at a number of industries and classes of assets.
At TFG when we discuss structured finance – we look at lending in multiple ways and syndicated financing.
Why is structured finance important?
Structured financial products are not always the typical lending and ‘market products’ that are advanced on the high street.
Usually structured finance is necessary when there is one or a number of discretionary transactions, and it is where alternative lending is used with risk mitigation instruments implemented.
New types of financing has led to the creation of instruments which are used to fund. Techniques are also used to manage risks that are inherent in transactions, which have developed to suit the financial markets and expand business reach. The net effect is that cash flows are transformed and the liquidity of financial portfolios is reshaped.
What is securitisation?
Securitisation is when financial products are created using a combined asset pool. The levels or split pools of these packaged products are then invested in – usually called ‘tranches’. An example of this may be a mortgaged back security (MBS) where mortgages may be grouped into a large pool – the issuer will look at the risk levels with the corresponding chance of default and create smaller pools based on this. Investors will take part in each tranche based on their due diligence and appetite for risk. The structure promotes liquidity as they market different tiers of the repackaged instruments to investors. It also allows access to investors in a larger asset pool.
A structured finance solution can sometimes be used to describe debt and equity that flow into the various levels of a company or group. This may be both short term and long dated debt. Structuring finance in this way could affect the value and risk of the company.
What’s a structured note?
A structured note refers to a debt security, which is issued by a financier and the return that is linked to it; it is based on the underlying performance of a basket of assets or index. These assets of pools at the base may be equity indexes, stocks, commodities, interest rates or currencies.
Structured finance products include:
- Securitized and collateralized debt instruments
- Syndicated loans
- Collateralized mortgage obligation (CMOs)
- Collateralized bond obligations (CBOs)
- Collateralized debt obligations (CDOs)
- Credit Default Swaps (CDSs) and
- Hybrid securities
Export finance: What are the requirements?
Structured finance is looked at and reviewed on a case by case basis. Generally, a financier would ask for the following in an application:
- Audited financial statements and cash flow statements
- Trades, the margin, product and countries involved
- Previous trading history
- Financial forecasts and growth projections
- Securities available
- Details and references of the directors
- Information on business assets and liabilities
Benefits of structured financing
Structured finance can often help companies restructure debt, make savings on repayments, and free up working capital to make cash work as efficiently as it can around a business. It is often useful when a company operates in different jurisdictions and trades globally.