Structured Finance
Candlefocus EditorStructured finance products are loan agreements that have been tailored to specific financing needs; using different parties and instruments. These products are generally non-transferable, and are typically more complex than typical debt or loan products. This is because they are designed to manage the risk and complexity inherent in the financing need. Terms and interest rates, repayment schedule, and other financial considerations can all be tailored to the individual financing need.
Collateralized debt obligations (CDO) are one of the most common types of structured finance products. CDOs are structured instruments backed by a pool of assets. They protect the issuer by providing a cushion against losses in case the collateral value decreases. These instruments allow the issuer to purchase securities at an agreed-upon price and receive income from the interest payments on these instruments.
Structured finance can also be used to develop financial markets in emerging markets. Governments and companies in developing countries often use structured finance to fund institutional developments and infrastructure. By creating instruments tailored to the needs of the market, structured finance can provide capital to support growth in these regions. It can also be used to finance projects with high risk or little commercial value, such as infrastructure and clean energy initiatives.
Structured finance is a complex and sophisticated financial instrument, tailored to providing capital to companies with specialized and complex financing needs. It can provide capital to fund growth, manage risk, and develop financial markets in new and emerging markets. While it has become increasingly popular, it is important to remember that structured finance is not a substitute for traditional financing. Companies should always weigh the advantages and disadvantages of structured finance before securing capital.