StructuredTradeFinance-WhatDoesItMean?
When it comes to financing a transaction, there are a variety of financial instruments available in the market including mortgages or overdrafts which consider the creditworthinessoftheborrower
However, there are borrowers in the market with unique financing requirements, demanding financing instruments accordingly In this blog, we will discuss what structuredtradefinanceisandhowitbenefitsborrowers.Keepreading:
WhatisStructuredTradefinance?
● Structured trade finance is a type of finance specifically designed to meet the unique or complicated financial needs of large corporations that are unsatisfied withtraditional/conventionalfinancialproducts.
● This type of trade finance is generally utilized in relation to high-valued cross-border trade transactions and covers a wide range of financial products & servicestomatchthecomplexfinancerequirementsoflargeorganizations
● Structuredtradefinanceistypicallydesignedforlarge-scalecorporationsthathave highly specified financing requirements that the existing financial instruments are unabletomeet.
● It is the most suitable option when the standard loans cannot cover the funding needsofanorganization.
SignificanceandBenefitsofStructuredFinance
As mentioned above, structured finance is a type of finance designed to cater to the financialneedsoflargecorporations
● Due to the substantial finance needs of corporations, structured finance products aren't offered by traditional lenders while borrowers with less financing
requirements often access other financial instruments such as Letters of Credit, otherLendingsolutions,etc.
● Since structured finance requires a major capital injection into an organization, these products are always non-transferable,ie.onecannotexchangethembetween varioustypesofdebtsinthesamewayasastandardloan.
● Various corporations, governments, and financial intermediaries are popularly using Structured trade finance to manage risks, expand business reach, and developfinancialmarkets.
ExamplesofStructuredFinanceProducts
When a conventional or standard loan is not enough to cover the complex funding requirementsofacorporation,anumberofstructuredfinanceproductsareoffered.
RecommendedRead:ImportFinanceandItsTypes
● Collateralized bond obligations (CBOs), collateralized debt obligations (CDOs), synthetic financial instruments, collateralized mortgage obligations (CMOs), hybrid securities, and credit default swaps (CDSs ) are common examples of structuredfinanceinstruments.
● Top-notch security is applied through securitization. Securitization is a process of building financial instruments by combining a group of financial assets and then selling those assets to investors. It promotes liquidity by enabling borrowers to convert assets into a form that can be easier bought and sold on the financial markets.
● Mortgage-backed securities (MBS) are the most popular of securitization as mortgages can be grouped into one large pool, enabling the issuer to divide the poolintoparts.
DifferentTypesofStructuredFinancing
Thereareseveraltypesofstructuredtradefinanceinstrumentssuchas:
Asset-backedSecurities
It is a typeoffinancialinvestmentthatiscollateralizedbyanunderlyinggroupofassetstypicallyonesthatgeneratecashflowsfromdebt,suchasloans,etc
Mortgage-backedsecurities
These are also asset-backed securities but secured by a collection of mortgage assets boughtbytheissuingbank.Itfurtherhastwotypes:
● Residentialmortgage-backed
● Commercialmortgage-backed
Collateralizedmortgageobligations(CMO)
It refers to a type of mortgage-backed instrument that contains a group of mortgages bundledtogetherandsoldasaninvestment
CollateralizedDebtObligations
It is a complex structured finance product that is backed by a pool of loans and other assetsandsoldtoinvestors.
RecommendedRead:ExportFinance-TypesAndWhyItIsRequired
Collateralizedfundobligation
This type of financial instrument protects the private equity fund and assets that are associatedwithhedgefunds.
Insurance-linkedsecurities
These types of instruments transfer the risks associated with losses in insurance due to unfavorableevents.
Conclusion
Now you know that structured trade finance products are meant to fulfill the complex financial needs of large corporationsusuallyunmetwithtraditionalfinancialinstruments. In recent years, structured finance products coupled with the latest advancements in technology are considered as prime reasons for the improved volumes of international trade.
