Selecting the right sources of funds and financial instruments for large property projects is one of the most important tasks of modern property developers. The advance of the financial market enables developers to use an ever-wider range of financial instruments adapted to their capital needs, risks and the changing conditions of the competitive property environment. One of these sources is what’s known as structured finance.

What is Structured Finance?

Structured finance is there for complicated financial problems. It is usually for larger companies and property professionals who require multifaceted, layered financial solutions.

This is broken up into three major categories:

• Development Finance – Suited for large and complex development projects.
• Bridging Finance – Stop-gap finance to get a project over the line in a matter of days.
• Mezzanine Finance – A hybrid of debt and equity financing, built for funding top-ups or maximum returns on minimum investment.

And comes in two forms:

• Residential Investment– Structured finance for residential projects.
• Commercial Investment – Structured finance for commercial projects.

These solve problems that regular financing cannot. It requires the deft touch of real experts to structure assets and securities to manage risk, create collateralised debt obligations (CDOs), reshape liquidity structures, etc.

Structured finance focuses less on the accumulation of debt and, as the name suggests, zones in on lending through structures and reorganising assets.

It’s the type of finance that offers multi-layered solutions for a time and a market where complexity is needed.

Examples of Structured Finance

There are different kinds of finance that fall under the umbrella of Structured Finance but we’ve listed some of the more common ones:

• Collateralised debt obligations (CDOs) – a funding package that combines loans, mortgages and other assets to convert them into tradable debt instruments that are offered to investors
• Collateralised bond obligations (CBOs) – combining junk bonds to create an investment-grade security, thereby creating diversification and reducing risks for investments
• Collateralised mortgage obligations (CMOs) – where mortgages are combined and sold as one investment, ranked by maturity and risk
• Credit default swaps – a contract that shifts the risk of a fixed income product to another party in exchange for a premium
• Syndicated loan – a loan extended by a group of financial institutions to one borrower
• Hybrid securities – a broad group of securities (e.g. stocks and bonds) that have debt and equity traits

What Are The Benefits of Structured Finance?

Due to the heavy financial needs of businesses that go for structured finance, this type of finance is not handled by all lenders. One major benefit of structured finance is that it provides huge financing for business with extensive and sophisticated needs, this type of finance is not accessible through conventional financial instruments such as simple loans. Unlike a standard loan that is flexible and transferable, structured finance cannot be transferred. Structured finance helps businesses manage their leverage and risk, expand their business reach and also access structured financial instruments.

A number of benefits structured finance has are:

• Ability to change cash flows and liquidity.
• Prompt payment.
• Significant collateral analysis and research is done.
• Solves problems that standard, mainstream loans cannot.
• A wide net of investors to draw from.
• Ability to upscale financial solutions.
• Can help to remove specific, undesirable assets.

For most, however, the biggest benefit of structured finance is how it delivers complex solutions in a simple, easy-to-grasp package.

How Does Structured Finance Differ From Other Financial Offerings?

The major difference between structured finance and other financial offerings is its ability to form bespoke deals on large, high value projects.

While other financial strategies may be better for smaller, simpler problems, structured finance is, by definition, an approach that only really works for big projects.

The major reason for this difference is structured finance’s use of a process called securitisation. This raises cash and liquidity by restructuring and combining assets which, when sold, gains interest from investors.

As processes like this suggest, it is a complicated, complex financial instrument, which is why structured finance is there for times when linear finance pathways won’t work.

Summary

As you can see, Structured Finance has many benefits for property professionals and corporations looking to raise large funds for development projects but it can be highly complex. Here at Pegasus Funding, we specialise in raising funds for many types of companies. Talk to us today and let’s help you drive your business forward.