What is Structured Finance?
Structured Finance is a division of the financial world that deals with managing and leveraging risk scenarios. Often, this sector of finance deals closely with financial law and negotiations. Structured finance deals mainly with large corporations or with groups or individuals that have financial needs much more complicated than normal. These corporations or individuals that seek more than a simple loan or single transaction will need an expert in structured finance and financial law to help navigate the financial world. For the purpose of understanding structured finance, it is often referred to as a financial tool or instrument.
Types of Structured Finance “Instruments”
Collateralized Debt Obligations
Collateralized Debt Obligations (CDO) are a package consisting of “cash-flow generating assets” that are sold to investors. These packages, or tranches, are made up of things such as mortgages, bonds, and loans. CDOs are created by security firms, CDO managers, rating agencies, financial guarantors, and or investors.
Synthetic Financial Instruments
Synthetic financial instruments are created and customized to fit the needs of a specific investor. These instruments make use of other financial instruments through simulation of cash flow patterns. These cash flows can pay income or price appreciation. Often, large companies use customizable financial instruments to fit their needs.
Collateralized Bond Obligations
Collateralized Bond Obligations (CBOs) are a collection of “junk bonds” that are not investment grade, however when bunched together, they can be considered investment grade under certain circumstances. The collection is separated into tiers and often have lower risks than individual bonds.
A syndicated loan comes from a group of lenders, rather than just one, who collaborate on funds for the borrower. When too much funding is needed for a single project, the borrower might have to look into a syndicated loan. These loans can provide more extensive funds because they are coming from a syndicate. The syndicate is comprised of an arranger (or a lead bank) and this individual or bank typically will front the largest portion of the loan. Syndicate loans work to minimize risk for the lender by spreading it across a larger group.
Along with being complicated, structured financing packages often comes from investors rather than lenders because of the scale of funds needed for this level of financing. People looking for personal loans don’t normally have to deal with structured financing, as it applies more to corporations and large-scale investment opportunities.