Structured finance

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Structured Finance ( English structured finance ) is in banking the collective term for financial instruments , which on classical lending go through complex and economic, regulatory, tax, or actual contractual arrangements are presented.

General

Structured financing is one of the financial innovations , because it was not until 1974 that the rating agency Standard & Poor’s began rating the first structured financing. With traditional lending, there are usually two participants, namely the bank as the lender and the borrower , possibly supplemented by a security provider . Structured financing, on the other hand, is characterized by the fact that there are regularly at least three participants who are exclusively companies and not natural persons . The combination of various financing instruments, which is individually tailored to customer needs, is based on the future, expected operating cash flow from the business on which the financing is based, as well as the associated risks. Structuring in the context of "financial engineering" is the customer-specific combination of several banking products.

criteria

Structured finance consists of three main elements:

  • Cash flow orientation: Structured financing is based on expected future cash flows that are used to repay the structured financing. The expected cash flows from a transaction or project are in the foreground when determining the debt service capability of the project.
  • Risk sharing : The banks involved ensure that the project risk is appropriately distributed and avoid a one-sided risk allocation. In accordance with the efficiency principle of risk allocation, the individual project risks should, if possible, be assigned to those participants who can best handle them based on their individual risk-related know-how .
  • Off-balance financing : the assets to be financed are brought into a new project or special-purpose vehicle that also acts as a borrower. Since the loans are often repaid through cash flows from other parties involved - and not from the borrower - one also speaks of non-recourse financing .

In this context, non-recourse (“no recourse”, “non-repayable”) means that it is not the borrower himself, but another party who is contractually responsible for the loan repayment. In addition, a “non-recourse loan” is also understood to mean a loan for which only any loan collateral is liable for its repayment, but not for the remaining free assets or even personal liability of the shareholder . This exclusion of the right of recourse is the main difference between asset-backed securities and secured credit.

species

The banks involved understand structured financing to mean different transactions, whereby various leasing models (such as sale-lease-back , cross-border leasing ) or property financing are sometimes also viewed as structured financing. In 2001, WestLB AG subsumed the products “Project Finance”, “Export Finance”, “Leveraged Finance”, “Leasing Finance” and “Structured Leasing and Arbitrage Products” as structured financing. In general, structured finance can be divided into four main groups:

Contract drafting

The involvement of several contracting parties involved requires a complex set of agreements which must ensure that the rights and obligations of each party are regulated and that the companies involved are fully integrated into the structured financing. The cash flows planned for repayment in whole or in part are redirected by assignments from the original creditor to the lending banks. Financial ratios ensure that the originally projected risk situation does not deteriorate during the term of the contract (compliance with debt ratios such as the interest burden ratio , debt service coverage ratio or debt service limit ). With regard to the cash flows, it should be noted that they not only have to cover the debt servicing for the structured financing, but also the other costs of the special purpose vehicle. In this case, the special purpose vehicle "insolvency remote" ( bankruptcy remote ). Since mostly international contracts have to be concluded, the choice of law , the choice of credit currency and the country risk are of considerable importance.

Organization at banks

Due to the increased professional requirements, banks regularly have special units for structured financing, which are usually assigned to investment banking . Since, in the case of cash flow-based financing, beyond the usual lender risk, banks ultimately also take a risk that approximates the entrepreneurial risk, the need for information and monitoring of the borrower or the transaction as well as the desire for influence and options for action is significantly greater than with the usual lending, which is based on the debt servicing ability of the borrower and not on the sustainability of the business case underlying the object of financing . In terms of banking supervisory law, these are so-called special financings, which represent cash flow-based, structured financings (project, property and commodity trade financings) for non-diversified special purpose vehicles .

literature

  • Früh / Müller-Arends in Banking Law and Banking Practice (edited by Wolfgang Gößmann / Thorwald Hellner / Jürgen Schröter / Stephan Steuer), Volume 2, Rn. 3 / 84a.

Individual evidence

  1. ^ Hermann Dambach, Structured Finance als Strategy , in: Die Bank, Issue 9, 1995, pp. 532-534
  2. ↑ Richard Guserl / Helmut Pernsteiner, Finanzmanagement , 2015, p. 292
  3. ↑ Moritz Brinkmann, Loan Securities on Movable Objects and Receivables , 2011, p. 41
  4. ↑ Christian Decker, Internationale Projektfinanzierung , 2008, p. 55
  5. ↑ in the case of non-diversified special purpose vehicles, the granularity of their assets is low