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Structured Credit Products: Credit Derivatives and Synthetic Securitisation, 2nd Edition by Moorad Choudhry

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CHAPTER 15

Synthetic Conduits and Credit Derivative Funding Structures

In this final chapter we show how the concept of synthetic securitisation has been applied to other established structured finance vehicles. Conduits are vehicles that are set up to issue commercial paper on behalf of their sponsor, while ‘repacks’ are repackaging vehicles, set up to transform an existing asset or basket of asset into another form of liability.1 We also show how synthetic structures have presented new opportunities for funding.

To set the discussion in the proper context, it is necessary to discuss the cash securitisation vehicles first, before considering how the synthetic version of these structures is put together.

COMMERCIAL PAPER CONDUITS

Commercial paper (CP) is a short-term money market funding instrument issued by corporates. Companies’ short-term capital and working capital requirement is usually sourced directly from banks, in the form of bank loans. An alternative short-term funding instrument is CP, which is available to corporates that have a sufficiently strong credit rating. CP is an unsecured promissory note. The issuer of the note promises to pay its holder a specified amount on a specified maturity date. CP normally has a zero coupon and trades at a discount to its face value. CP is typically issued in bearer form, although some issues are in registered form.

Originally the CP market was restricted to borrowers with high credit rating, and although lower rated borrowers do ...

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