What is the first thought which comes in to our mind after reading the word Structured Finance, a sector in Finance. It is generally developed to transfer risk with a complex legal as well complex entities.
It is helpful in securitization of financial assets like credit cards, mortgages, and auto loans, which ahs helped them opening new opportunity for consumers.
It has contributed to the degradation of the underwriting standards of financial assets.
A rise in the credit as well as in the credit crash experience has been noticed few years back.
Its Structure is as follows:
Securitization: It's a method of creating pool assets that are used in the creation of end product of financial instrument.
. Tranche: Its an important part of structured financing because, it involves to create different investment classes for the securities that are created in structured finance world.
Their main goal is allow the cash flow from one investor group to another investor group.
It is well supported with the use of credit support like prioritization of payment to different trenching.
Credit Enhancement: It plays a vital role in creating money from a security which has Higher rating than the issuing company.
It is created by issuing subordinate bonds.
Here loans are greater than the balance of the bonds.
It also involves use of derivatives such as swap, corridors and caps.
Credit Ratings: It is a very important role to play in structured Finance.
Other structures: It involves structures like mezzanine risk participation. Here there is no laid out fixed structure unlike in the first step which Securitization, which serves as the subset for structured transactions.
Types of Structured Finance:
Asset Back security: In this type Income are derived from by a specific Pool of underlying assets.
It also includes common payments from credit cards, auto loans, etc.
Mortgage back securities: It is an debit obligation which represents the claim of the cash flow from generally mortgage loans, most commonly known as motgage pools.
Collateralized mortgage obligation: It a includes banks, hedge funds,Insurance company, mutual funds, Etc.
Collateralized Debt obligations: It's a Group of fixed income assets such as High heel debt.
Collateralized bond Obligations: They are primarily are corporate Bonds.
Collateralized Loan Obligations: They are leveraged bank loans.
Credit derivatives: They are contracts to transfer the risk of total return on a credit asset falling