Structured finance is a generic term referring to financings more complicated than traditional loans, generic bonds, and common equity. Relatively simple transactions that lower corporations’ funding costs by converting floating rate obligations to fixed rate obligations (or the opposite) through the use of interest rate swaps are traditionally considered structured finance transactions. Financial engineering involving special purpose entities (SPEs) is also considered a part of structured finance. Extremely complicated leveraged products such as constant proportion debt obligations (CPDOs) and complicated securitizations such as collateralized debt obligations of collateralized debt obligations (CDOn) are also included in the definition of structured finance.
Key motivations for using structured finance include lowering funding costs, changes in debt and equity composition of the balance sheet, taking companies public or private, freeing up balance sheet capacity, monetizing balance sheet assets, financing assets, regulatory capital arbitrage, sheltering corporations from operating liabilities, tax management, financing leveraged buyouts, poison pill takeover defenses, hedge fund speculation, accounting rule compliance, and leverage. The structures may address several issues at once including risk transfer, accounting, taxation, bankruptcy, and credit enhancement.
Securitization is a generic term for a subset of structured finance. A securitization ...