Structured Finance: Benefits, Examples of Structured Financing 20/12/2022, 9:06 PM

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FINANCE BASICS

Structured
Finance:
Benefits,
Examples of
Structured
Financing
By JAMES CHEN Updated June 28, 2020

Reviewed by MARGARET JAMES

Fact checked by ARIEL COURAGE

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Structured Finance: Benefits, Examples of Structured Financing 20/12/2022, 9:06 PM

Investopedia / Michela Buttignol

What Is Structured
Finance?
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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. Collateralized debt
obligations (CDOs), synthetic
financial instruments, collateralized
bond obligations (CBOs), and
syndicated loans are examples of
structured finance instruments.

KEY TAKEAWAYS
Structured finance is a
financial instrument
available to companies with
complex financing needs,
which cannot be ordinarily
solved with conventional
financing.
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Traditional lenders do not
generally offer structured
financing.
Structured financial

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Structured Finance: Benefits, Examples of Structured Financing 20/12/2022, 9:06 PM

products, such as
EDUCATION NEWS SIMULATOR YOUR MONEY ADVISORS ACADEMY
collateralized debt
obligations, are non-
transferable.
Structured finance is being
used to manage risk and
develop financial markets
for complex emerging
markets. Advertisement

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Structured Finance

Understanding
Structured Finance
Structured finance is typically
indicated for borrowers—mostly
extensive corporations—who have
highly specified needs that a simple
loan or another conventional
financial instrument will not satisfy.
In most cases, structured finance
involves one or several discretionary
transactions to be completed; as a
result, evolved and often risky
instruments must be implemented.

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Benefits of Structured
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Structured Finance: Benefits, Examples of Structured Financing 20/12/2022, 9:06 PM

Finance
Structured financial products are
typically not offered by traditional
lenders. Generally, because
structured finance is required for
major capital injection into a
business or organization, investors
are required to provide such
financing. Structured financial
products are almost always non-
transferable, meaning that they
cannot be shifted between various
types of debt in the same way that a
standard loan can.

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Increasingly, structured financing
and securitization are used by
corporations, governments, and
financial intermediaries to manage
risk, develop financial markets,
expand business reach, and design
new funding instruments for
advancing, evolving, and complex
emerging markets. For these

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Structured Finance: Benefits, Examples of Structured Financing 20/12/2022, 9:06 PM

entities, using structured financing

transforms cash flows and reshapes
the liquidity of financial portfolios,
in part by transferring risk
from sellers to buyers of the
structured products. Structured
finance mechanisms have also been
used to help financial institutions
remove specific assets from their
balance sheets.

Examples of Structured
Finance Products
When a standard loan is not enough
to cover unique transactions
dictated by a corporation's
operational needs, a number of
structured finance products may be
implemented. Along with CDOs and
CBOs, collateralized mortgage
obligations (CMOs), credit default
swaps (CDSs), and hybrid securities,
combining elements of debt and
equity securities, are often used.

Securitization is the process through

which a financial instrument is
created by combining financial
assets, commonly resulting in such
instruments as CDOs, asset-backed
securities, and credit-linked notes.
Various tiers of these repackaged
instruments are then sold to
investors. Securitization, much like
structured finance, promotes

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Structured Finance: Benefits, Examples of Structured Financing 20/12/2022, 9:06 PM

liquidity and is used to develop the

structured financial products used
by qualified businesses and other
customers. There are many benefits
of securitization, including being a
less expensive source of funding
and better use of capital.

Mortgage-backed securities (MBS) a

model example of securitization and
its risk-transferring utility.
Mortgages may be grouped into one
large pool, leaving the issuer the
opportunity to divide the pool into
pieces that are based on the risk of
default inherent to each mortgage.
The smaller pieces may then be sold
to investors.

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Related Terms
What Are Tranches?
Definition, Meaning, and
Examples
Tranches are portions of secuitized
financial products structured to divide
risk or group characteristics in ways that
are marketable to various investors.
more

Bespoke CDO
A bespoke CDO is a structured financial Partner Links
product that a dealer creates and
Get daily insights on what's moving the markets
customizes for a specific group of and why it matters..
investors, who then buy a tranche
(portion) of it. more Learn to trade stocks by investing $100,000
virtual dollars...

What Is a Credit Default Sign up for our daily newsletters

Swap (CDS), and How Does Listen to the Investopedia Express podcast on
It Work? Spotify
A credit default swap (CDS) is a
particular type of swap designed to
transfer the credit exposure of fixed
income products to another party. more

Credit Event Definition

A credit event is a negative change in a
borrower's capacity to meet its
payments, which triggers settlement of a
credit default swap (CDS) contract. more

What Is a Debt Instrument?

Definition, Structure, and
Types
A debt instrument is a tool an entity can
use to raise capital. Any type of
instrument primarily classified as debt
can be considered a debt instrument.
more
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Structured Finance: Benefits, Examples of Structured Financing 20/12/2022, 9:06 PM

more

Who Is Lewis Ranieri?

Lewis Ranieri, former bond trader and
former vice-chair of Salomon Brothers, is
credited with introducing securitization
to the financial world. more

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Structured Finance: Benefits, Examples of Structured Financing 20/12/2022, 9:06 PM

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ADVANCED
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&
INSTRUMENTS

CMO vs
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Same
Outside,
Different
Inside

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