Introduction to Structured Finance
October 2006, ©2006
About the Authors.
Chapter 1: Introduction.
Definition of Structured Finance.
Other Definitions of Structured Finance.
Case Study: How Enron Has Affected the Boundaries of Structured Finance.
Chapter 2: Interest Rate Derivatives.
Interest Rate Forward and Futures Contracts.
Interest Rate Swaps.
Caps and Floors.
Chapter 3: Credit Derivatives.
Documentation and Credit Derivative Terms.
Credit Default Swaps.
Credit Default Swap Index.
Basket Default Swaps.
Total Return Swaps.
Economics of a Total Return Swap.
Chapter 4: Basic Principles of Securitization.
What Is a Securitized Transaction?
Illustration of a Securitization.
Reasons Why Entities Securitize Assets.
Benefits of Securitization to Investors.
What Rating Agencies Look at in Rating Asset-Backed Securities.
Description of the Collateral.
Defaults and Delinquencies.
Chapter 5: Securitization Structures.
Use of Interest Rate Derivatives in Securitization Transactions.
More Detailed Illustration of a Securitization.
Chapter 6: Cash Flow Collateralized Debt Obligations.
Family of CDOs.
Basic Structure of a Cash Flow CDO.
CDOs and Sponsor Motivation.
Chapter 7: Synthetic Collateralized Debt Obligation Structures.
Motivations for Synthetic CDOs.
Investor Risks in Synthetic Transactions.
Variations in Synthetic CDOs.
The Single-Tranche Synthetic CDO.
Summary of the Advantages of Synthetic Structures.
Factors to Consider in CDO Analysis.
Chapter 8: Securitized and Synthetic Funding Structures.
Asset-Backed Commercial Paper.
Synthetic Funding Structures.
Chapter 9: Credit-Linked Notes.
Description of CLNs.
Illustration of a CLN.
Forms of Credit Linking.
The First-to-Default Credit-Linked Note.
Chapter 10: Structured Notes.
Structured Notes Defined.
Motivation for Investors and Issuers.
Issuance Form and Issuers.
Creating Structured Notes.
Examples of Structured Notes.
Chapter 11: Large Ticket Leasing: Leasing Fundamentals.
How Leasing Works.
Types of Equipment Leases.
Full Payout Leases versus Operating Leases.
Reasons for Leasing.
Types of Lessors.
Lease Brokers and Financial Advisers.
Financial Reporting of Lease Transactions by Lessees.
Federal Income Tax Requirements for True Lease Transactions.
Valuing a Lease: The Lease or Borrow-to-Buy Decision.
Chapter 12: Leveraged Lease Fundamentals.
Parties to a Leveraged Lease.
Structure of a Leveraged Lease.
Closing the Transaction.
Cash Flows During the Lease.
Debt For Leveraged Leases.
Credit Exposure of Equity Participants.
Tax Indemnification for Future Changes in Tax Law.
Need for a Financial Adviser.
The Steps in Structuring, Negotiating, and Closing a Leveraged Lease.
Chapter 13: Project Financing.
What Is Project Financing?
Reasons for Jointly Owned or Sponsored Projects.
Credit Exposures in a Project Financing.
Key Elements of a Successful Project Financing.
Causes for Project Failures.
Credit Impact Objective.
Meeting Internal Return Objectives.
Other Benefits of a Project Financing.
Disincentives to Project Financing.
APPENDIX A: The Basel II Framework and Securitization.
Impact on Securitization and Credit Derivatives.
APPENDIX B: Synthetic Securitization: Case of Mortgage-Backed Securities.
APPENDIX C: Home Run! A Case Study of Financing the New Stadium for the St. Louis Cardinals (Cynthia A. Baker and J. Paul Forrester).
APPENDIX D: Municipal Future-Flow Bonds in Mexico: Lessons for Emerging Economies (James Leigland).
APPENDIX E: Crown Castle Towers LLC, Senior Secured Tower Revenue Notes, Series 2005-1 (Taimur Jamil).
APPENDIX F: MVL FIlm Finance LLC (Olga Filipenko).
APPENDIX G: Presale: Honda Auto Receivables 2006-1 Owner Trust (Amanda M. Soriano and Nadine E. Gunter).
APPENDIX H: Presale: ACG Trust III (Anthony Nocera, Ted Burbage, Philip Baggaley, and Michael K. Vernier).
APPENDIX I: CNH Equipment Trust 2006-A (Du Trieu, Bradley Sohl, Joseph S. Tuczak, and Peter Manofsky).
APPENDIX J: CIT Equipment Collateral 2006-VT1 (Brigid E. Fitzgerald, John Bella, and Peter Manofsky).
HENRY A. DAVIS, MBA, is an editor, writer, and consultant working in the fields of banking and corporate finance. He currently serves as Editor of two quarterly professional journals, the Journal of Structured Finance and the Journal of Investment Compliance.
MOORAD CHOUDHRY is Head of Treasury at KBC Financial Products in London. Previously, he worked at JPMorgan Chase Bank, where he was a vice president of structured finance services sales and marketing.
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