Structured finance is a heavily involved financial instrument presented to large financial institutions or companies with complicatedfinancing needs who are unsatisfied with conventional financial products. Since the mid-1980s, structured finance has become popular in the finance industry. Collateralized debt obligations (CDOs), synthetic financial instruments, collateralized bond obligations (CBOs), and syndicated loans are examples of structured finance instruments.
Key Takeaways
Structured finance is a financial instrument available to companies with complex financing needs, which cannot be ordinarily solved with conventional financing.
Traditional lenders do not generally offer structured financing.
Structured financial products, such as collateralized debt obligations, are non-transferable.
Structured finance is being used to manage risk and develop financial markets for complex emerging markets.
Structured finance is typically indicated for borrowers—mostly extensive corporations—who have highly specified needs that a simple loan or another conventional financial instrument will not satisfy. In most cases, structured finance involves one or several discretionary transactions to be completed; as a result, evolved and often risky instruments must be implemented.
Benefits of Structured Finance
Structured financial products are typically not offered by traditional lenders. Generally, because structured finance is required for major capital injection into a business or organization, investors are required to provide such financing. Structured financial products are almost always non-transferable, meaning that they cannot be shifted between various types of debt in the same way that a standard loan can.
Increasingly, structured financing and securitizationare used by corporations, governments, and financial intermediaries to manage risk, develop financial markets, expand business reach, and design new funding instruments for advancing, evolving, and complex emerging markets. For these entities, using structured financing transforms cash flows and reshapes the liquidity of financial portfolios, in part by transferring risk fromsellers to buyers of the structured products.Structured finance mechanisms have also been used to help financial institutions remove specificassets from their balance sheets.
Examples of Structured Finance Products
When a standard loan is not enough to cover unique transactions dictated by a corporation's operational needs, a number of structured finance products may be implemented. Along with CDOs and CBOs, collateralized mortgage obligations (CMOs), credit default swaps (CDSs),and hybrid securities, combining elements of debt and equity securities, are often used.
Securitization is the process through which a financial instrument is created by combining financial assets, commonly resulting in such instruments as CDOs, asset-backed securities, and credit-linked notes. Various tiers of these repackaged instruments are then sold to investors. Securitization, much like structured finance, promotes liquidity and is used to develop the structured financial products used by qualified businesses and other customers. There are many benefits of securitization, including being a less expensive source of funding and better use of capital.
Mortgage-backed securities (MBS) a model example of securitizationand its risk-transferring utility. Mortgages may be grouped into one large pool, leaving the issuer the opportunity to divide the pool into pieces that are based on the risk of default inherent to each mortgage. The smaller pieces may then be sold to investors.
It provides benefits such as risk mitigation, improved access to capital, and flexibility in managing balance sheets. Structured financing examples include securitization of assets, tranching for different levels of risk and return, and credit enhancement techniques.
Structured Finance is a complex form of financing, usually used on a scale too large for an ordinary loan or bond. Collateralized debt-obligations, syndicated loans and Mortgage-Backed Securities – the C4 behind the 2008 financial crisis – are all examples of Structured Finance.
Increasingly, structured financing and securitization are used by corporations, governments, and financial intermediaries to manage risk, develop financial markets, expand business reach, and design new funding instruments for advancing, evolving, and complex emerging markets.
Structured finance utilizes securitization to pool assets, creating novel financial instruments to enable better use of available capital or serve as a cheaper source of funding, especially for lower-rated originators.
Generally, structured funds will guarantee a portion of the total investment. For example, if an S&P 500 structured fund protects 80% of its principal, this means that it will invest 80% of its funds in fixed-income products with little chance of falling below the principal amount.
Imagine you are embarking on a home renovation project that needs funds to implement your design plans. Your financial structure is analogous to determining the portion of the project cost you will fund with your savings (equity) versus the amount you borrow from the bank (debt).
These include loss given default, the potential for downgrade known as ratings volatility risk, market liquidity, and price discovery. In many types of structured credit products, these risks can be material and may result in significant losses.
The name “structured” is explained by the fact that these financial transactions are composed of collateral-backed securities; think of asset-backed securities and mortgage-backed securities.
Structured products have three components: bond base/ banknotes; an underlying asset like an exchange-traded or index fund; and a derivative product, such as a forward or options contract. The various types of structured products include bonds, banknotes, and certificates of deposit (CDs).
Structured products are financial instruments whose performance or value is linked to that of an underlying asset, product, or index. These may include market indices, individual or baskets of stocks, bonds, and commodities, currencies, interest rates or a mix of these.
Issuing a structured product is different from selling one. Often the bank issues the structured product and also distributes it, but there are also distribution partners, independent from the banks, that advise investors on structured products and earn money on sales.
Structured Finance Definition: In Structured Finance, banks pool together loans backed by cash flow-producing assets into securities and sell “tranches” of these securities into the capital markets; these securities use tools like credit enhancements to make each tranche riskier or less risky than the “average loan” in ...
Securitization is a subset of structured finance that allows creditors to monetize certain assets by transferring them to a bankruptcy remote special-purpose vehicle, or SPV, which in turn either borrows from traditional lenders or issues securities backed by those assets.
Structured Finance refers to securitized assets, whereas Project Finance encompasses all off-balance sheet sources of funding, not only securitized sources.
It combines the flexibility of fiat money with the intrinsic value and stability of commodities, such as gold or other precious metals. One notable example of a structured currency is the gold standard, which prevailed in several Western countries during the 19th and early 20th centuries.
Examples of structured investments include: term loans with warrants, convertible debt, preferred stock with dividends, royalties, and hybrids or combinations of these instruments.
For example, if you win $500,000, your structured settlement might require the defendant to pay you $50,000 every June for ten years. You can design a structured settlement so that it provides money when you need it most. Here are a few options. Large initial payment.
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