Structured Fiance - Clarification

[Cipher2014]

Hi,

I'm going through the structured finance reading material and have a few very basic question that I'd like to clarify before moving on.

Q1: Is Structured Product simply a security created through the process of Structured Financing (e.g. A class of security with higher credit rating than its issuing company)?

My understanding is that Securitization is a subclass of Structured Finance, the outcome of which is a Structured Product. (e.g. Structured Finance --> Securitization --> Structured Product)

Q2: Does a Structured Product always have to have to have tranches? Or that's just a special case applicable to CXO's.

Q3: If a firm ring-fences a business unit and issues bond on it, is the bond considered a Structured Product or is it just a regular bond? (assuming the ring-fenced business unit has a higher credit rating than the parent company).

Thanks!
Cipher

 

[Cipher2014]

Could someone help to answer my question?

Thanks!

 

[cdbsmith]

Hi,

I'm going through the structured finance reading material and have a few very basic question that I'd like to clarify before moving on.

Q1: Is Structured Product simply a security created through the process of Structured Financing (e.g. A class of security with higher credit rating than its issuing company)?

My understanding is that Securitization is a subclass of Structured Finance, the outcome of which is a Structured Product. (e.g. Structured Finance --> Securitization --> Structured Product)

Q2: Does a Structured Product always have to have to have tranches? Or that's just a special case applicable to CXO's.

Q3: If a firm ring-fences a business unit and issues bond on it, is the bond considered a Structured Product or is it just a regular bond? (assuming the ring-fenced business unit has a higher credit rating than the parent company).

Thanks!
Cipher

@Cipher2014,

I'm not sure I fully understand your questions, but I will attempt to answer them anyway.

Q1: I think the best way to answer this question is to state that securitization is the process by which the cash flows from assets (e.g., mortgages, credit card receivables, auto loans, student loans, etc.), that are otherwise indivisible, are restructured and marketed to investors. This allows firms that own the securitized assets to transfer risk, improve the balance sheet, reduce regulatory capital, and increase their ability to originate more loans.

Q2: I will interpret this one as a question on whether there is a minimum number of tranches required for a structured product. A structured product can be setup/marketed with even a single tranche. Banks/FIs will do this to mitigate the risk of a specific asset (e.g., large loan).

Q3: I don't think bonds qualify as structured products. If a business ring-fences a business unit that has a higher credit rating, the more likely scenario is that it was determined that they are better off operating as separate units than the whole/sum. As such, the ring-fenced business is likely to be operating independently and is therefore free to issue bonds as it deems necessary.

Let me know if I did not provide the answers you were looking for.

 

[Cipher2014]

Hi cdbsmith,

Thanks for your insightful answers and clarification. It's definitely more clear to me know!

Cheers!
Cipher2014