Investment banks have a vast variety of different product groups, one of which is the Structured Finance Group (SF Group), also commonly referred to as “Structured Products”. Generally speaking, structured finance is a set of complex transactions offered for financing purposes. SF Groups usually work with car loan, credit card, and student loan companies because they have stable cash flows. Clients typically use these structured products in order to refinance high yield debt obligations or help pay off this debt once it has reached maturity.
Structured finance has gained industry popularity since the mid-1980s; it is a prevalent financial instrument introduced to large financial institutions and corporate clients with more complex financing requirements who are discontent with standard financial products. The concept can seem a little daunting and confusing, but chances are you have already heard of some structured finance instruments, such as collateralized debt obligations (CDOs), synthetic financial instruments, syndicated loans, and collateralized bond obligations (CBOs). Normally, structured products include the use of derivatives. 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 finance relies on securitization in order to pool assets, creating new financial instruments. There are many reasons for securitization:
• Better use of available capital
• Alternative funding
• Cheaper source of funding
• Credit concentration reduction
• Risk management of interest rates and liquidity
• Risk transfer
One key feature of structured finance is that these products are, as a rule, non-transferable, which implies that they cannot be carried over between various types of debt as a conventional loan can.
Simply put, structured finance comes into play when a company needs money to expand its business or develop a project. Institutions, such as an investment bank, normally customizes a loan using structured finance to meet the client’s needs. Taking into account all the particularities of a client’s project, the bank then structures the loan into levels of guarantees. That’s why the term “structured” is used to describe these instruments. The lenders in the upper levels of the structure earn low interest rates. Meaning, if the borrower goes bankrupt, they have more chances of getting their money back. The lender at the bottom of the structure, however, who earn higher interest rates, would be less likely to get their money back in case of bankruptcy.
Positives of Structured Finance
•The investors’ ability to customize a variety of assumptions into a single instrument is considered to be one of the biggest advantages of structured products.
•Within this realm of products there’s another major plus -- something called a “lookback product”. The main idea behind it is that the underlying asset’s value is independent of its final value at expiration, but rather is dependent on the average of values taken over time.
•And finally, the use of “credit enhancement” and “bankruptcy remoteness” is also a noteworthy positive. These two help bridge the gaps within corporate ratings, incentivizing investors to invest and thereby entail a lower interest rate which in turn reduces the issuer’s cost of debt.
Negatives of Structured Finance
•The biggest downturn to structured finance is its association with large credit risk. The credit risk is normally due to tight liquidity and sometimes unclear costs.
•The riskiest investments among these are often those collateralized instruments that have the highest risk loans in the entire investment.
At the end of the day structured finance is a tool like any other, so put it to good use!
FAQs
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.
What do people in structured finance do? ›
Securitization is the core of structured finance. It is the method by which those in structured finance create asset pools and ultimately form complex financial instruments that are useful to corporations and investors with special needs.
What is the difference between corporate finance and structured finance? ›
Corporate Finance is about calculating, forecasting, managing and raising of funds for use by an organisation. It can be for working capital and/or capex investments. This is done through equity and/or debt. Structured Finance is a process of issuing bonds against a pool of loans.
How does structured trade finance work? ›
Structured trade finance works by bringing trade finance products from across the supply chain together so that they have a coherent structure. The types of finance and security packages available to a borrower can vary widely, leading to many different types of structured trade finance.
What is the difference between structured finance and securitization? ›
Securitization is the process of creating and issuing securities backed by a pool of assets. Structured finance, broadly defined, refers to the repackaging of cash flows that can transform the risk, return, and liquidity characteristics of financial portfolios.
What is structured finance in simple words? ›
Structured finance is a heavily involved financial instrument presented to large financial institutions or companies with complicated financing needs who are unsatisfied with conventional financial products. Since the mid-1980s, structured finance has become popular in the finance industry.
Does structured finance pay well? ›
Structured Finance Salary in California. $41,400 is the 25th percentile. Salaries below this are outliers. $59,200 is the 75th percentile.
What is an example of a structured product? ›
The various types of structured products include bonds, banknotes, and certificates of deposit (CDs). The benefits of structured product investments include access to high-return products without risking the initial investment; investors having the liberty to customize investments to their liking; etc.
Is structured finance a capital market? ›
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 ...
Is structured finance a project finance? ›
Project finance is a structured finance solution. It is used to pay for the construction and operation of projects such as wind farms, hydroelectric dams or highways. It is long-term financing. Debt-repayment is mainly based on cash flows generated from the completed project.
Manage and monitor the performance of structured finance portfolios, including tracking cash flows, analyzing investment performance, and providing regular reports to stakeholders. Stay abreast of market trends and developments in structured finance to offer strategic advice and recommendations to clients.
How big is the structured finance market? ›
According to the latest research, the global Structured Finance market size was valued at USD 1724586.98 million in 2022 and is expected to expand at a CAGR of 12.47% during the forecast period, reaching USD 3490976.01 million by 2028.
What is structured finance at EY? ›
The Structured Finance group, is a group within FSO that specializes in addressing varying needs of market participants in the securitization marketplace across asset classes, including asset- backed securities (ABS), commercial mortgage- backed securities (CMBS), residential mortgage- backed securities (RMBS) and ...
Is structured finance considered investment banking? ›
Investment banks have a vast variety of different product groups, one of which is the Structured Finance Group (SF Group), also commonly referred to as “Structured Products”. Generally speaking, structured finance is a set of complex transactions offered for financing purposes.
What are the four pillars of trade finance? ›
The four pillars of trade finance – payment, risk mitigation, financing, and information – collaborate in the complex web of international trade to enable the orderly exchange of goods and services.
What are the three types of securitization? ›
There are three most common types of securitisations from the perspective of cash flow: Collateralized Debt, Pass-Through and Pay-Trough structures. Collateralized debt is the form most similar to traditional asset-based borrowing.
What is the role of a structurer in finance? ›
Structurers must be able to understand and analyze the risks associated with different financial products, evaluate their profitability, and optimize their performance. In addition to these technical skills, structurers must also have excellent communication skills to work effectively with clients and team members.
What is the role of the financial structure? ›
Financial structure defines the composition of a company's capital, representing the mix of different funding sources used to operate and expand its business. Imagine you are embarking on a home renovation project that needs funds to implement your design plans.
What is a structured finance associate job description? ›
Job Description
Take leadership in transactions as directed by managers. Create, develop, or review construction and operating financial model of single or multiple assets. Create, develop, format, and edit Power Point slides for both internal and external presentations.
