Structured Finance - Explained
What is Structured Finance?
Written by J. Mance Gordon
Updated at April 22nd, 2024
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What is Structured Finance?
Structured finance is a type of finance specifically designed for large corporations with unique or complicated financial needs that surpass the standard financial products available for firms. In order to match the financial needs of large corporations, structured finance was established to produce a greater financial instrument. Structured finance is more complex than ordinary financial instruments offered to corporations such as loans. Example of financial instruments categorized as structured finance are collateralized bond obligations (CBOs) and collateralized debt obligations (CDOs).
How Does Structured Finance Work?
Structured finance is specifically for large corporations with sophisticated financial needs. While borrowers with less need can access other financial instruments such as loans, large corporations that have needs that simple loans cannot solve can access structured finance. Not all lenders or financial institutions offer structured finance, it typically entails complicated transactions before it can be completed.
Significance and Benefits of Structured Finance
Due to the heavy financial needs of businesses that go for structured finance, this type of finance is not handled by all lenders. Traditional lenders are the categories of lenders at the forefront of structured finance. One major benefit of structured finance is that it provides huge financing for business with extensive and sophisticated needs, this type of finance is not accessible through conventional financial instruments such as simple loans. Unlike standard loan that is flexible and transferable, structured finance cannot be transferred. Structured finance helps businesses manage their leverage and risk, expand their business reach and also access structured financial instruments.
Examples of Structured Finance Products
Collateralized bond obligations (CBOs), collateralized debt obligations (CDOs), synthetic financial instruments, collateralized mortgage obligations (CMOs), hybrid securities and credit default swaps (CDSs ) are common examples of structured finance instruments. These products can only be accessed when a standard loan is insufficient to cover the financial needs of a corporation. Hybrid securities are formed through securitization, this means the combination of financial assets birth hybrid securities. Securitization is likened to structure finance, an example of securitization is a mortgage-backed security (MBS).