Structured finance is a term that covers a very wide range of financial market transactions and products. While a common definition of it seems to center on securitization, structured financial products also include credit derivatives, bonds with embedded options, leveraged leasing, project financing, and a variety of other complex financing transactions. Created by the experienced author team of Frank Fabozzi, Henry Davis, and Moorad Choudhry, Introduction to Structured Finance examines the essential elements of this discipline and makes them understandable to a wide audience--from professionals generally familiar with the world of finance who want to enhance their technical knowledge to specialists in some structured finance disciplines who want to become more familiar with others. Written in a straightforward and accessible style, this comprehensive guide--along with its information-packed appendices--contains a broad view of structured finance that includes: * Securitization * Interest rate derivatives (such as options, caps, and floors) * Credit derivatives (such as asset swaps and total return swaps) * Securitized and synthetic funding structures * Cash and synthetic collateralized debt obligations (CDOs) * Credit-linked notes and structured notes * Complex leasing transactions * Project financing Structured finance plays an important and growing role in today's financial markets. Indeed, a large part of financial innovation in recent years has been related to securitization, credit derivatives, or a combination of the two. Introduction to Structured Finance offers a well-rounded treatment of this dynamic discipline, a convenient reference covering all the important transaction types in one place, and an excellent opportunity to enhance your financial skills.
FRANK J. FABOZZI, PHD, CFA, CFP, is an Adjunct Professor of Finance at Yale University's School of Management and the Editor of the Journal of Portfolio Management.
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.
Structured finance is a term that covers a very wide range of financial market transactions and products. While a common definition of it seems to center on securitization, structured financial products also include credit derivatives, bonds with embedded options, leveraged leasing, project financing, and a variety of other complex financing transactions. Created by the experienced author team of Frank Fabozzi, Henry Davis, and Moorad Choudhry, Introduction to Structured Finance examines the essential elements of this discipline and makes them understandable to a wide audience--from professionals generally familiar with the world of finance who want to enhance their technical knowledge to specialists in some structured finance disciplines who want to become more familiar with others. Written in a straightforward and accessible style, this comprehensive guide--along with its information-packed appendices--contains a broad view of structured finance that includes: * Securitization * Interest rate derivatives (such as options, caps, and floors) * Credit derivatives (such as asset swaps and total return swaps) * Securitized and synthetic funding structures * Cash and synthetic collateralized debt obligations (CDOs) * Credit-linked notes and structured notes * Complex leasing transactions * Project financing Structured finance plays an important and growing role in today's financial markets. Indeed, a large part of financial innovation in recent years has been related to securitization, credit derivatives, or a combination of the two. Introduction to Structured Finance offers a well-rounded treatment of this dynamic discipline, a convenient reference covering all the important transaction types in one place, and an excellent opportunity to enhance your financial skills.
FRANK J. FABOZZI, PHD, CFA, CFP, is an Adjunct Professor of Finance at Yale University's School of Management and the Editor of the Journal of Portfolio Management.
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.
Preface vii
About the Authors xiii
CHAPTER 1 Introduction 1
Definition of Structured Finance 1
Other Definitions of Structured Finance 2
Case Study: How Enron Has Affected the Boundaries of Structured Finance 15
Conclusions 22
CHAPTER 2 Interest Rate Derivatives 23
Interest Rate Forward and Futures Contracts 23
Futures Contracts 24
Interest Rate Swaps 26
Options 36
Caps and Floors 43
CHAPTER 3 Credit Derivatives 45
Documentation and Credit Derivative Terms 45
Credit Default Swaps 48
Credit Default Swap Index 50
Basket Default Swaps 51
Asset Swaps 54
Total Return Swaps 57
Economics of a Total Return Swap 58
CHAPTER 4 Basic Principles of Securitization 65
What Is a Securitized Transaction? 66
Illustration of a Securitization 67
Reasons Why Entities Securitize Assets 70
Benefits of Securitization to Investors 79
What Rating Agencies Look at in Rating Asset-Backed Securities 79
Description of the Collateral 82
Prepayments Measures 87
Defaults and Delinquencies 90
CHAPTER 5 Securitization Structures 95
Use of Interest Rate Derivatives in Securitization Transactions 95
Credit Enhancement 104
More Detailed Illustration of a Securitization 113
CHAPTER 6 Cash Flow Collateralized Debt Obligations 119
Family of CDOs 120
Basic Structure of a Cash Flow CDO 122
CDOs and Sponsor Motivation 124
Compliance Tests 127
CHAPTER 7 Synthetic Collateralized Debt Obligation Structures 133
Motivations for Synthetic CDOs 134
Mechanics 136
Funding Mechanics 138
Investor Risks in Synthetic Transactions 140
Variations in Synthetic CDOs 141
The Single-Tranche Synthetic CDO 147
Summary of the Advantages of Synthetic Structures 149
Factors to Consider in CDO Analysis 150
Case Study 151
CHAPTER 8 Securitized and Synthetic Funding Structures 155
Commerical Paper 155
Asset-Backed Commercial Paper 157
Synthetic Funding Structures 162
CHAPTER 9 Credit-Linked Notes 181
Description of CLNs 181
Illustration of a CLN 182
Investor Motivation 182
Settlement 182
Forms of Credit Linking 184
The First-to-Default Credit-Linked Note 190
CHAPTER 10 Structured Notes 193
Structured Notes Defined 194
Motivation for Investors and Issuers 196
Issuance Form and Issuers 197
Creating Structured Notes 198
Examples of Structured Notes 199
CHAPTER 11 Large Ticket Leasing: Leasing Fundamentals 207
How Leasing Works 207
Types of Equipment Leases 208
Full Payout Leases versus Operating Leases 211
Reasons for Leasing 211
Types of Lessors 216
Lease Brokers and Financial Advisers 217
Lease Programs 217
Financial Reporting of Lease Transactions by Lessees 218
Federal Income Tax Requirements for True Lease Transactions 222
Synthetic Leases 224
Valuing a Lease: The Lease or Borrow-to-Buy Decision 225
CHAPTER 12 Leveraged Lease Fundamentals 237
Parties to a Leveraged Lease 239
Structure of a Leveraged Lease 243
Closing the Transaction 245
Cash Flows During the Lease 246
Debt For Leveraged Leases 247
Facility Leases 249
Construction Financing 252
Credit Exposure of Equity Participants 253
Tax Indemnification for Future Changes in Tax Law 253
Need for a Financial Adviser 254
The Steps in Structuring, Negotiating, and Closing a Leveraged Lease 256
CHAPTER 13 Project Financing 259
What Is Project Financing? 260
Reasons for Jointly Owned or Sponsored Projects 262
Credit Exposures in a Project Financing 262
Key Elements of a Successful Project Financing 264
Causes for Project Failures 265
Credit Impact Objective 277
Accounting Considerations 279
Meeting Internal Return Objectives 282
Other Benefits of a Project Financing 282
Tax Considerations 283
Disincentives to Project Financing 283
Recent Trends 284
APPENDIX A The Basel II Framework and Securitization 287
Basel Rules 288
Impact on Securitization and Credit Derivatives 293
APPENDIX B Synthetic Securitization: Case of Mortgage-Backed Securities 297
Transaction Description 297
Deal Structures 298
Investor Considerations 301
APPENDIX C Home Run! A Case Study of Financing the New
Stadium for the St. Louis Cardinals
Cynthia A. Baker and J.
Paul Forrester 303
APPENDIX D Municipal Future-Flow Bonds in Mexico: Lessons for
Emerging Economies
James Leigland 309
APPENDIX E Crown Castle Towers LLC, Senior Secured Tower
Revenue Notes, Series 2005-1
Taimur Jamil 321
APPENDIX F MVL FIlm Finance LLC
Olga Filipenko 335
APPENDIX G Presale: Honda Auto Receivables 2006-1 Owner
Trust
Amanda M. Soriano and Nadine E. Gunter 339
APPENDIX H Presale: ACG Trust III
Anthony Nocera, Ted
Burbage, Philip Baggaley, and Michael K. Vernier 345
APPENDIX I CNH Equipment Trust 2006-A
Du Trieu,
Bradley Sohl, Joseph S. Tuczak, and Peter Manofsky 355
APPENDIX J CIT Equipment Collateral 2006-VT1
Brigid E.
Fitzgerald, John Bella, and Peter Manofsky 365
Index 373
FRANK J. FABOZZI, PHD, CFA, CFP, is an Adjunct Professor of Finance at Yale University's School of Management and the Editor of the Journal of Portfolio Management.
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.
Structured finance is one of those elusive terms that mean different things to different people. With this wonderful book, authors Fabozzi, Davis and Choudhry first explore the boundaries of what is and is not considered to be structured finance. A simple definition would be that structured finance is any form of non-traditional financing, but this begs the question of where to draw the line between traditional and non-traditional. Certainly, most people wouldn't consider a vanilla swap to be structured finance! Structured finance might be described in terms of techniques that are commonly employed—securitization, derivatives, special purpose vehicles (SPVs), leasing, project finance, etc. The authors explore this and other approaches to, if not defining structured finance, at least clarifying its boundaries.-- Riskbook.com
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