By Peter Wanyama, Legal Compliance Specialist
1.0 INTRODUCTION.
Structured Finance transactions, sometimes seen as a system of earnings management, are basically off-balance sheet financing techniques that enable a company to raise cheap funds from the capital markets than it would have had it issued securities directly. Examples of structured finance transactions include securitisation (Asset – Backed Finance), leveraged buy-out transactions, project finance and similar transactions that involve the origination of financial assets.
Perhaps it is useful at this point to briefly outline what each finance technique involves. In a typical securitization transaction, a company that seeks to raise cash from the capital markets may transfer certain of its assets to a special purpose vehicle (SPV) or a trust in a “true sale” legal arrangement. The transferred assets are referred to as receivables or financial assets while the company transferring these assets is known as the originator. The term obligors refer to the entities who are obligated to pay the transferred receivables. Upon the transfer of these assets to the SPV or trust, it can then issue securities or debt-like instruments in the capital markets. The holders of these securities are then paid from the proceeds received from the receivables. The types of assets that have been traditionally securitised include mortgage loans, corporate loans, credit card receivables and other self-liquidating assets. In the Euro-Dollar markets, complex securitisation structures have been developed that allow even risk in project lending to be securitized.
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