What is Structured Finance?
Structured finance is a highly involved financial instrument that is provided to major financial institutions or companies with complex funding needs that are unmet with traditional financial items.
Structured finance has become popular within the finance industry since the mid-1980s. Examples of structured finance instruments include collateralised debt obligations (CDOs), synthetic financial instruments, collateralised bond obligations (CBOs), and syndicated loans.
Breaking Down Structured Finance
Structured finance is usually suggested for borrowers, mostly large corporations, who have highly defined needs that would not be fulfilled by a simple loan or another traditional financial instrument. In most cases, structured finance involves one or more discretionary transactions to be completed, resulting in the implementation of evolved and often risky tools.
Benefits of Structured Finance
The traditional lenders typically do not offer structured financial products. Typically speaking, since structured financing is needed for significant injections of capital into a company or organisation, investors are required to provide such funding.
Structured financial goods are almost always non-transferable, meaning they cannot be exchanged in the same way a conventional loan can between different types of debts.
Corporations, governments, and financial intermediaries are increasingly using structured funding and securitisation to manage risk, build capital markets, extend the business scope, and devise new financing instruments to grow, evolve, and challenge emerging markets.
The use of structured financing transforms cash flows for these entities. It reshapes the liquidity of financial portfolios, in part by transferring risk from sellers to buyers of the structured products. Structured methods of funding were often used to help financial institutions extract unique assets from their balance sheets.
