Structured finance

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What is structured finance?  

There is no universal definition of structured finance, but the Bank for International Settlements (BIS) defines structured finance through three key characteristics:

  1. pooling of assets (either based on balance sheet assets or synthetically created);
  2. trenching of the liabilities backed by the asset pool;
  3. dissociation of the credit risk from the pool of collateral assets through the use of an autonomous, limited-life special purpose vehicle (SPV).

Structured finance thus allows companies seeking financing for their infrastructure or equipment projects to receive off-balance sheet treatment and thus increase their short-term liquidity. It is therefore specifically designed to meet unique capital needs and solve financing problems that are not easily covered by traditional loans. As such, these financing instruments are designed to transform cash flows and reshape the liquidity structure of balance sheets through securitization.

What are the different types of structured finance?

Structured finance is used in acquisition finance, project finance, asset finance, and export finance, for example. What changes is what is financed, risk, straturation and lenders.

Acquisition finance and leveraged finance (LBO/MBO)
A Leveraged Buyout (LBO) allows financial entities to take advantage of the debt markets to raise funds to acquire a target company (or even part of its business) with limited capital. Future cash flows from the acquired assets can be used to secure the debt. A MBO (Management Buyout) allows a management team to acquire all or part of the company's shares through a new company formed specifically for this purpose.

Project finance
Project finance is a form of syndicated financing designed to finance long-term infrastructure, industrial and utility projects using a non-recourse or limited recourse financial structure. The debt and equity used to finance the project is repaid from the cash flows generated by the project. Again, this is a loan structure that relies primarily on the project's cash flows for repayment, with the project's assets, rights and interests held as secondary collateral.
Project finance is particularly attractive to the private sector because companies can finance large off-balance sheet projects.

Asset finance
Asset finance enables companies to finance assets such as aircraft, ships, trains and, in some cases, real estate.