Loading the player...

What is 'Structured Finance'

Structured finance is a highly involved financial instrument offered to large financial institutions or companies that have complex financing needs that don't match with conventional financial products.

Since the mid-1980s, structured finance has become a substantial space in the financial industry. Collateralized debt obligations (CDOs), synthetic financial instruments, collateralized bond obligations (CBOs) and syndicated loans are all examples of structured finance instruments.

BREAKING DOWN 'Structured Finance'

Structured finance is typically indicated for borrowers – mostly extensive corporations – that have unique or highly specified needs. A simple loan or other type of conventional financial instrument, will not suffice to resolve such need. In most cases, structured finance involves one or several discretionary transactions to be completed and thus evolved and often risky instruments must be implemented.

Examples of Structured Finance Products/Instruments

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

Significance and Benefits

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-transferrable, meaning that they cannot be transferred between various types of debt in the same way that a standard loan is.

More and more, structured financing (and securitization) are used by corporations, governments and financial intermediaries in advancing, evolving and complex emerging markets to manage risk, develop financial markets, expand business reach and design new funding instruments. For these entities, using structured financing transforms cash flows and reshapes the liquidity of financial portfolios.

Securitization

Securitization is the process through which a financial instrument is created by combining financial assets. Various tiers of these repackaged instruments are then sold off to investors. Securitization, much like structured finance, promotes liquidity and is also used to develop the structured financial products used by uniquely qualified businesses and other customers.

A mortgage-backed security (MBS) is a model example of securitization. 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.

RELATED TERMS
  1. Financial Structure

    The specific mixture of long–term debt and equity that a company ...
  2. Structured Note

    A debt obligation that also contains an embedded derivative component ...
  3. Equity Financing

    The act of raising money for company activities by selling common ...
  4. Securitization

    The process through which an issuer creates a financial instrument ...
  5. Debt Instrument

    A paper or electronic obligation that enables the issuing party ...
  6. Finance

    The science that describes the management, creation and study ...
Related Articles
  1. Investing

    Understanding Structured Finance

    Structured finance refers to a complex financial transaction involving large financial institutions and companies with unique needs.
  2. Investing

    What is Debt Financing?

    When a company needs to pay for something, it can pay with cash, or it may finance the purchase. Financing means that it gets the money from other businesses or sources, in return for obligations. ...
  3. Small Business

    What is Equity Financing?

    Companies that are short on cash may need financing to pay for short-term needs or long-term capital expenditures.
  4. Managing Wealth

    4 Structured Product Types Wealthy Clients Love

    High-net-worth investors find structured products appealing for a variety of reasons. Here's a look at four types.
  5. Investing

    A Primer On Collateralized Debt Obligation (CDOs)

    A collateralized debt obligation, or CDO, is a structured financial product backed by a pool of loans. When a retail or commercial bank approves loans such as mortgages, auto loans or credit ...
  6. Trading

    An Introduction To Structured Products

    Learn a simple way to bring the benefits of derivatives into your portfolio.
  7. Personal Finance

    CDOs and the Mortgage Market

    These structured products contribute to keeping borrowing rates low.
  8. Investing

    Understanding Financial Instruments

    Financial instrument is a general term used to describe a monetary asset.
  9. Small Business

    Is Equity Financing the Right Choice for Your Business?

    Discover the benefits and drawbacks of equity financing for a small business, and learn when equity financing should be used instead of debt financing.
  10. Investing

    What Does Finance Cover?

    Finance is the study of banking, leverage, credit, capital markets, money and investments, along with how they are used by individuals and companies.
RELATED FAQS
  1. What are the benefits for a company using equity financing vs. debt financing?

    Learn what some of the principal advantages are for a company that chooses to utilize equity financing in preference to debt ... Read Answer >>
  2. What are the benefits and shortfalls of the Herfindahl-Hirschman Index?

    Learn about the differences between equity and debt financing and how they impact financials. Find out how businesses determine ... Read Answer >>
  3. What are some ways of financing an acquisition?

    Learn about how business acquisitions are financed, from using private equity funds to receiving huge acquisition loans from ... Read Answer >>
  4. Why do banks securitize some debts, and how do they sell them to investors?

    Learn how and why banks securitize debt, how the securitized debt is sold to other investors, and how different the different ... Read Answer >>
  5. Are all mortgage backed securities (MBS) also collateralized debt obligations (CDO)?

    Learn more about mortgage-backed securities, collateralized debt obligations and synthetic investments. Find out how these ... Read Answer >>
  6. When should a business avoid debt financing?

    Read about the optimal use of debt in a business capital structure and how to know when a business should avoid further debt ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center