Introduction to Structured Finance


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.


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.

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.

Asset 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.

Prepayments Measures.

Defaults and Delinquencies.

Chapter 5: Securitization Structures.

Use of Interest Rate Derivatives in Securitization Transactions.

Credit Enhancement.

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.

Compliance Tests.

Chapter 7: Synthetic Collateralized Debt Obligation Structures.

Motivations for Synthetic CDOs.


Funding Mechanics.

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.

Case Study.

Chapter 8: Securitized and Synthetic Funding Structures.

Commerical Paper.

Asset-Backed Commercial Paper.

Synthetic Funding Structures.

Chapter 9: Credit-Linked Notes.

Description of CLNs.

Illustration of a CLN.

Investor Motivation.


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.

Lease Programs.

Financial Reporting of Lease Transactions by Lessees.

Federal Income Tax Requirements for True Lease Transactions.

Synthetic Leases.

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.

Facility Leases.

Construction Financing.

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.

Accounting Considerations.

Meeting Internal Return Objectives.

Other Benefits of a Project Financing.

Tax Considerations.

Disincentives to Project Financing.

Recent Trends.

APPENDIX A: The Basel II Framework and Securitization.

Basel Rules.

Impact on Securitization and Credit Derivatives.

APPENDIX B: Synthetic Securitization: Case of Mortgage-Backed Securities.

Transaction Description.

Deal Structures.

Investor Considerations.

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).