Before understanding structured finance, you need to have a cursory understanding of what a capital market means in the financial world. A capital market is where buyers and sellers trade financial securities such as stocks, bonds, etc. The trading is done mostly in long-term securities, with the magnitude of the capital market of a nation being directly interconnected to its economic size.
Structured Finance training is a developing trend in the capital market with huge potential and scope. In order to get a thorough understanding of this subject, Imarticus Learning has come up with a Financial Services and Capital Markets course.
This 6-month capital market certification course will give a comprehensive knowledge of the market, FinTech domains, risk, and investment banking. Imarticus has collaborated with IIM Lucknow to offer the best-in-class education for management professionals to reignite their financial services careers. This article will help you understand how structured financing works and its benefits in the capital market and financial services.
What is Structured Finance?
Most large-scale companies face complex financing needs that conventional financing cannot always solve. This is where a financial instrument known as structured finance comes into play. It is used to mitigate risk and develop financial needs for complex emerging markets. Structured financial products are non-transferable and generally not offered by traditional lenders. Collateralized debt obligations are one of the most commonly used structured financial products.
Comprehensive Understanding of Structured Finance
Most extensive business entities have highly specified financial requirements that traditional financial instruments, such as a simple loan, cannot fulfill. These complexities are solved with structured finance involving several discretionary transactions through the implementation of evolved and less risky financial instruments. The primary goal of structured finance is to eliminate the free cash flow by providing financial solutions involving different asset classes across diverse enterprises.
Various structured finance products and combinations of products can be used to achieve the financing necessities of large-scale borrowers. Structured finance products include:
- Collateralized bond obligations (CBOs)
- Hybrid securities
- Collateralized debt obligations (CDOs)
- Syndicated loans
- Collateralized mortgage obligations
- Credit default swaps (CDSs)
Benefits of Structured Finance
Large scale industries and institutions such as banks partake in complex economic activities, such as structured finance. In such cases, the amounts that are made available circulating through the global economy in this process are massive.
If you take the example of the 2008 financial crisis in the world, you will see that the Federal Reserve bought mortgage-backed securities for roughly about $38 billion. However, while there was no flaw in the basic concept, the American economy was crippled by the ensuing vast surpluses of cash flow caused by mortgage-backed securities.
This is a problem that can be solved by structured finance. It will help organizations restructure debt, garner savings on repayments, and free up working capital. As a result, these businesses can efficiently make their cash work. Also, it is usually helpful for companies that operate in different jurisdictions and trade globally.
Structured finance is a sequence of complex financial instruments that are offered to unique borrowers — usually where growth in a business is quite sophisticated compared to simpler business models. It can be roughly translated into a cyclical turn of events as below:
- Securitized debt and lending via structures
- Export finance
- Growth capital via multiple debt facilities
- Restructuring debt and refinancing