Structured finance
From Wikipedia, the free encyclopedia
The term 'Structured Finance' is often used very loosely to cover a range of complex loan transactions. In its purest sense it can be defined as the practice of arranging for a lender to make a loan under conditions that are structured so as to free the lender from concern over the credit-worthiness of the borrower. Being repaid is, of course, the central concern of any lender, and the credit-worthiness of a borrower is ordinarily of central importance to that concern, but innovative practices in law and finance have generated ways of greatly reducing the importance of borrower credit-worthiness. Structured finance transaction will have the following characteristics:
1. the borrowing will be by a Special Purpose Entity (SPE):
(a) which is bankruptcy remote from either the sponsors or the original asset owner. Typically this is achieved by either creation of an new vehicle or through a 'true sale' of the asset to an SPE;
(b) where the assets are “off-balance-sheet;
(c) which is stand alone and only carries out the business of owning and (sometimes) operating those assets;
(d) which is generally subject to very restrictive covenants as to activities.
2. the most common structured financing are:
(a) securitisation - which is created by a sale/transfer of receivables from the owner to the SPE; and
(b) project finance - new SPE's for large scale, long term, revenue generating infrastructure projects - power plants, pipelines, ports etc, all which provide good quality receivables normally created by 3rd party contracts.
