Structured Finance

Structured Finance

Structured finance
Securitization – bundling loans into bonds (quick money, risk transferred to investors)
Tranching – division into layers (senior = safer, junior = riskier)
SPV structure – special company for structuring (separation from the bank)
Waterfall structure – allocation of cash flow (first to senior, then to junior)
Credit enhancement – improvement of credit quality (insurance, overcollateralization)
Overcollateralization – collateral greater than debt (protection)
Subordination – priority (senior paid earlier)
Cash reserve – cash reserve for default scenarios
Letter of credit – letter from the bank on solvency
Insurance wrap – insurance of bonds (monolines to raise rating)
CDO squared – CDO of other CDOs (complex structure, used before 2008)
Synthetic CDO – CDO with credit default swaps (more flexible)
Credit derivative – derivative on credit risk (CDS, etc.)
Total return swap – swap of total return for interest (capital saving)
Credit default swap (CDS) – bond insurance (pay spread every quarter, receive payment in case of default)
CDS index – index of CDS of many companies (for example, iTraxx Europe)
Recovery rate – how much is returned in case of default (for example, 40 cents on the dollar)
Default probability – probability of default (used in calculations)