Structured & Asset Finance

3 calculators on this page

Reach for this firstSizing the debt from the cash flow

Going deeperThe borrowing base, and what is left of the ledger Weighted average life

This deskWhat it does, who is in the room, and how the transactions relate.

The desk at a glance

Structured and asset finance lends against a defined pool of assets, or a single identified asset, rather than against a company. The borrower's own credit becomes almost irrelevant; what matters is whether the assets keep producing cash and whether they survive the failure of whoever created them.

That separation is the entire product. Loans are sold into a vehicle that exists for no other purpose, whose ability to go bankrupt is deliberately restricted, and whose cash is distributed by a contract rather than by a management decision. The waterfall is the instrument; the collateral is only its input. Cash arrives at the top and flows down through tests, and a breached test redirects money that would have gone to junior holders.

The other half of the desk is the opposite of a pool: one aircraft, one ship, one power station. There is no diversification at all, so everything depends on the asset's residual value and on the contract that generates its revenue. The lender is underwriting an asset and a counterparty, and the analysis has more in common with a lease than with a loan.

Who does what

• The originator creates the assets — a bank making mortgages, a lender making car loans, a company generating invoices — and wants them off its balance sheet or funded more cheaply than it could fund itself. See the securitisation.
• The issuing vehicle owns the assets and issues the notes. It has no employees, no other business and restricted powers, which is what makes it survive the originator's failure.
• The servicer collects the money for years. Its importance is easy to miss and impossible to overstate: a structure with no credible replacement servicer has a single point of failure that no amount of subordination protects against.
• The rating agencies model the pool and decide how much protection each tranche needs. The structure is built to those requirements, which is why deals within an asset class look so alike.
• The trustee enforces the waterfall and holds the security for the noteholders.
• The tranche buyers — different investors for different pieces, with very little overlap. A deal that cannot place its junior tranches does not print.

What decides whether this desk is busy

Six mechanisms, each with the direction it pushes in and the thing to watch. None of them is a forecast, and none is a number that goes out of date.

The calendar this business keeps

Every desk has a rhythm its regulars plan around and a newcomer discovers by being surprised by it.

How this desk reaches the rest of the site

The deals and the instruments are one subject. These are the corridors — each one a mechanism, not a resemblance.

How the work is actually doneWhat the client pays for, the documents in order, and the arithmetic.

What the client is actually paying for

Three costs, and only one of them is a fee:

• The arrangement fee — for structuring the vehicle, negotiating the documents and taking the deal through the agencies. Large in absolute terms because the work is legal and one-off.
• The spread on each tranche — the ongoing cost of the money, different for each layer because each layer bears a different amount of risk.
• The retained piece. Regulation in most jurisdictions requires the originator to keep a slice of the risk, so that whoever created the assets still cares how they perform. This is the response to a specific failure and it is the most consequential rule on the desk.

Whether the whole exercise is worth doing comes down to one comparison: the blended cost of the tranches against what the originator would pay to borrow unsecured. When its own credit is weak and the assets are good, the gap is large and the structure pays for itself several times over. When its credit is strong, it usually does not — which is also the answer to why a bank would keep the assets and sell only the risk.

Which blocker decides across this desk

• Price4 of 8The two sides cannot agree what it is worth.Decides: Aircraft finance, CLO issue, Commercial real estate loan, Shipping finance. Matters on 4 more.
• Financing4 of 8The money is not there, or its cost moved under the deal.Decides: CLO issue, Commercial real estate loan, Project finance, Shipping finance. Matters on 4 more.
• Approval3 of 8A regulator, a court, a board or a shareholder vote says no.Decides: Project finance, Securitisation, Significant risk transfer. Matters on 2 more.
• Diligence3 of 8What was found when the buyer actually looked.Decides: Project finance, Receivables finance, Securitisation. Matters on 4 more.
• Execution4 of 8Documents, disclosure, timetable, and the people running it.Decides: CLO issue, Project finance, Receivables finance, Securitisation. Matters on 4 more.

The documents, in the order they appear

• The warehouse facility — a temporary loan used to accumulate the pool before the term deal exists. If the term market shuts while the warehouse is full, the risk sits with whoever funded it.
• The sale agreement — how the assets move to the vehicle, and whether that transfer is a true sale that survives the originator's insolvency. The whole structure rests on this one question.
• The servicing agreement — who collects, on what standard, for what fee, and who takes over if they stop.
• The offering circular — the disclosure, including the pool description and the historical performance data the sizing was based on.
• The priority of payments — the waterfall itself, in both its normal and its post-enforcement forms. Reading the second one is how you find out what the notes are actually worth.
• The investor report — published monthly or quarterly for the life of the deal. The most transparent corner of credit and the least read.

Run the numbers

Interactive: the borrowing base, and what is left of the ledgerMedium

Open this calculator on its own page →

Asset-backed lending in one line. The collateral is not what the sales ledger says: ineligible invoices come out first, a dilution reserve comes out next, and only then does the advance rate apply to what is left.

Sales ledger ($m) Ineligible % Dilution reserve % Advance rate % Currently drawn ($m) Interest rate % Days sales outstanding

Eligible receivables

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Dilution reserve

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Borrowing base

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Headroom

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Financeable share of the ledger

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Annual interest

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Cost per collection cycle

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Reading

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What counts as ineligible — a concentration limit, an overdue bucket, a disputed invoice, a related party, a debtor in the wrong country — is defined in the facility agreement, and that definition moves this number far more than the advance rate does. Information and education only. Not advice, not a valuation, and not a quote for anything.

Interactive: sizing the debt from the cash flowMedium

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A corporate borrows a multiple of its earnings. An asset borrows whatever its own cash flow can service at the coverage the lender insists on — which is a different question and gives a different answer.

Cash available for debt service ($m/yr) Target coverage (×) Interest rate % Tenor (years)

Annual debt service

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Debt supported

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Principal repaid in year one

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Interest in year one

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Coverage after a fifth off

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Fall to reach 1.00×

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Reading

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A level annuity at one fixed rate, which no real facility is: there is usually a construction period with no service at all, a margin that steps, and a tail the lender leaves after the contracts end. Information and education only. Not advice, not a valuation, and not a quote for anything.

Interactive: weighted average lifeHard

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A note off an amortising pool is not quoted against its final maturity, because most of the money is back long before then. It is quoted against when the money actually returns, weighted by how much of it returns then.

Pool balance ($m) Scheduled term (years) Annual prepayment rate %

Weighted average life

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With no prepayment

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Difference

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Last principal returned

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Principal returned in total

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Reading

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Straight-line scheduled amortisation, annual steps, and one constant prepayment speed — real pools amortise on their own schedules, pay monthly, and prepay at a speed that moves with rates. Information and education only. Not advice, not a valuation, and not a quote for anything.

Go deeper, and practiseLonger pieces, what an interview asks here, and a page to print.

Go deeper

How a deal dies here

• The junior tranches do not place. The senior piece is easy and the equity is the deal; no buyer for the bottom means no transaction.
• The true sale is not clean in one of the jurisdictions the assets sit in, and the separation the whole structure depends on cannot be given.
• There is not enough performance history to size the protection. A new asset class is expensive to fund for exactly this reason.
• The pool underperforms in the warehouse, and the deal that was modelled is not the deal that can be sold.
• A capital rule changes and the natural buyer of a tranche stops being allowed to hold it.

Test yourself: structured finance

Quick questions on this desk — four options each, checked entirely on your device, nothing stored or sent. Wrong answers come with explanations, and the deep dives above hold every one of them. For education only.

What an interview asks here

Structured finance questions test whether you can hold three things at once: a pool of assets, a legal structure that isolates it, and a rule about who takes the first loss.

Try each one out loud before you open it. What is underneath is the shape of a complete answer, not a script — somebody who can produce those parts in their own words can also answer the four variations that follow, and somebody who has memorised a paragraph can answer one.

Q1Explain a securitisation to somebody who has never heard of one.

What it is checking. The opening question, and the answer has to reach tranching without jargon.

A complete answer contains:

• A lender has thousands of small loans. It sells them to a company created for the purpose, which exists only to hold them.
• That company funds the purchase by issuing notes, and the loans' repayments pay the notes.
• The notes are issued in layers. The bottom layer absorbs the first losses; the top layer is untouched until the bottom is gone.
• So one pool of identical loans becomes several instruments with genuinely different risk, which is the whole trick.
• The originator usually keeps a slice, because post-crisis rules require the party that chose the loans to own some of the outcome.

Read it properly: Securitisation · The mechanism

Q2What decides the rating of a senior tranche?

What it is checking. The answer is correlation, and most candidates say credit quality.

A complete answer contains:

• The expected loss on the pool matters, but it is largely absorbed by the subordinate tranches.
• What decides the senior tranche is whether the loans default together — the correlation assumption.
• Low correlation means losses are diversified away and the senior tranche is genuinely remote; high correlation means it is exposed to one common factor.
• That assumption is the least visible thing in the documentation and the most consequential.
• It is what the 2007 to 2009 losses tested, and it is why the whole market was rebuilt around retention and disclosure afterwards.

Read it properly: Securitisation · Subprime, 2008

Q3What is the special purpose vehicle for?

What it is checking. It sounds like a formality and it is the structural foundation.

A complete answer contains:

• To hold the assets beyond the reach of the originator's own creditors, so the notes depend on the pool rather than on the seller.
• That rests on a true sale opinion — if the transfer is recharacterised as a secured loan, the assets return to the seller's estate.
• There is a second risk: consolidation, where a court treats the vehicle and the originator as one. Independent directors and restricted activities exist to reduce it.
• Limited recourse and non-petition clauses stop a single creditor putting the vehicle into insolvency and collapsing the waterfall.
• It is a legal opinion about a specific transaction, not a fact about vehicles in general.

Read it properly: Securitisation · Covered bond issue

Q4Why does a bank do a synthetic securitisation?

What it is checking. Capital, and the candidate should say so before mentioning funding.

A complete answer contains:

• To reduce the regulatory capital it must hold against a portfolio, by transferring a defined slice of credit risk.
• The loans stay on the balance sheet: the customer relationship, the servicing and the assets do not move. Only credit exposure does.
• The supervisor has to be satisfied that enough risk genuinely left — significant risk transfer is a test that can be refused.
• The investor is paid for a mezzanine risk on a pool it did not originate and cannot select, so the originator's retained interest is the first thing it reads.
• It is not primarily a funding trade, which is what distinguishes it from a cash securitisation.

Read it properly: Significant risk transfer · CLO issue

Q5How does a CLO differ from a static securitisation?

What it is checking. A managed structure behaves differently in a downgrade, and that is the answer.

A complete answer contains:

• It is actively managed: the manager buys and sells loans within a reinvestment period rather than holding a fixed pool.
• It is governed by tests — ratings, diversity, over-collateralisation and interest coverage — that divert cash when they fail.
• So its behaviour under downgrades is mechanical: breaching a test forces action regardless of the manager's view.
• That mechanism is why a wave of downgrades in leveraged loans transmits into forced selling rather than into negotiation.
• And it is why the identity of a loan's holder changes what happens to a stressed borrower.

Read it properly: CLO issue · The leveraged finance desk

Q6What is an attachment point?

What it is checking. A precision question. Answering it with two numbers rather than a description is the differentiator.

A complete answer contains:

• The pool loss level at which a tranche starts taking losses; the detachment point is where it is wiped out.
• A tranche attaching at 3% and detaching at 7% is a four-point-wide claim on a much larger pool.
• Width matters as much as position: a thin mezzanine tranche is close to binary, while a wide senior one is not.
• The same expected loss can therefore sit in two tranches with completely different distributions.
• Which is why an expected-loss rating and a probability-of-default rating say different things about the same slice.

Read it properly: Securitisation · The tranche calculator

Q7What is the borrowing base in a receivables facility?

What it is checking. Asset-based lending in one number, and it is a good test of whether somebody has seen a facility.

A complete answer contains:

• Take the sales ledger, remove the ineligible invoices — past a concentration limit, overdue, disputed, related party, wrong jurisdiction.
• Take a dilution reserve off what is left, for credits and returns that reduce invoices without anybody defaulting.
• Apply the advance rate to the remainder. That is the borrowing base, and it is what may be drawn.
• The base is recalculated regularly, so it falls when the ledger falls — which is exactly when the borrower needs it most.
• What counts as ineligible is defined in the facility agreement, and that definition moves the number far more than the advance rate does.

Read it properly: Receivables finance · The borrowing base

Q8Why did risk retention become a rule?

What it is checking. A regulatory question that has a clean incentive answer.

A complete answer contains:

• Before it, an originator could select loans, sell all of the resulting risk, and keep only the fee.
• That separates the party choosing the loans from the party bearing the outcome, which is the definition of a moral hazard.
• Retention requires the originator to keep a slice — commonly a defined proportion, in one of several permitted forms.
• The intent is alignment rather than protection: the slice is too small to make an investor whole and large enough to matter to the originator.
• It arrived on both sides of the Atlantic in the years after the crisis and is now part of what makes a securitisation compliant at all.

Read it properly: Securitisation · Subprime, 2008

Do these against a clock → — one at a time, ninety seconds each, answer before you look.

Whose questions these are. Every question on this page was written for this publication. None is taken from anybody else’s question bank, and none is a claim about what any named firm asks — that is neither verifiable from here nor ours to assert. They are our own reading of which mechanism a question of this kind is testing. Information and education only.

How the transactions fit together

Every transaction here separates an asset from the company that owns it, so that the lending is decided by the asset rather than by the borrower. A securitisation is the general form: a pool of receivables is sold into a vehicle and the vehicle issues notes in tranches, each one absorbing losses in a fixed order. A CLO issue is that structure applied to leveraged loans and actively managed, which adds a manager to the list of things the investor is relying on. Receivables finance is the same idea without the note issue — the invoices are sold or pledged, and the funding is a facility rather than a bond.

Where the asset is single and physical, the structure follows the asset. Project finance lends against something that does not exist yet, so the construction period is the risk and the contracts around it are the security. Commercial real estate loans, aircraft finance and shipping finance each lend against one asset with a resale market, and differ mainly in how quickly that asset can be moved to a different user in a different country.

Two of them are about the bank rather than the borrower. A significant risk transfer keeps the loans on the bank's books and sells the first losses on them, which is a capital transaction wearing a credit transaction's clothes; a covered bond — on the debt capital markets desk — does the opposite, keeping both the assets and the risk and using the pool only as security. The pair is the clearest illustration of what these structures actually move.

Concepts to master

• Tranching does not remove risk; it moves it. The senior notes are safer because the junior ones absorb losses first — see the instrument and the mechanism.
• Correlation is what tranching cannot survive. Subordination sized on the assumption that losses are independent is sized wrongly when they are not.
• Excess spread is the first line of defence, before subordination is touched at all — and it disappears quietly, which is why the investor report matters.
• The call date changes the instrument without changing the collateral. A note that may be redeemed early has a maturity nobody controls.
• Collateralised loan obligations are the organised buyer of leveraged loans, which makes this desk the funder of that one. See the CLO and the instrument.

Analysis

⬇ The whole desk on one printable page

Who pays whom, drawn

The timetable on a transaction page says what happens and in what order. These say where the money goes — every payment between the parties, and what each one is for. Only the transactions where the cast list alone does not answer that carry one; each diagram sits on its own page.

• Receivables finance — Lending against invoices
• Securitisation — A securitisation, from loan to note
• Project finance — Project finance: the asset is the borrower
• CLO issue — A CLO, and who is actually choosing
• Significant risk transfer — Synthetic risk transfer: the loans do not move

Who does this: Structured & Asset Finance is a sell-side seat in Investment Banking, alongside Mergers & Acquisitions, Equity Capital Markets, Debt Capital Markets, Leveraged Finance, Restructuring, Valuation & Deal Analysis. See the industry map.