Structured finance expertise / Corporate banking | Video interview with Etienne Dizarny

Written interview summarized | Structured finance

What exactly is structured finance?

Structured financing is financing for a company, which is the opposite of corporate financing. A company that has equity and good cash flow can take on debt on its own without the bank collecting collateral. On the other hand, when a company needs to finance a large investment or activity and does not have the necessary financial resources, it can resort to the structured finance. The bank will then be able to structure a loan on the basis of guaranteesand contractsThe bank can then take on the risk of a larger financing package.

These structured financings will fall into two broad categories:

Asset financing: which can be real assets, but can also include the financing of company takeovers or project financing. The easiest way is leasing. The bank has the security of an asset that it can resell, and this allows it to put up a large loan for a company that has little equity. This is also the case with trade finance, where the bank is secured by the ownership of the goods at all times. This makes it possible to set up large financing lines to finance small companies. There is also project financing, where a new company is created for this project, and where the bank will set up structured financing with different calls: guarantees by sponsors, product takeover contracts, insurance, and possibly subsidized loans.

Structured market financing (or securitization): has as its specificity, and as a complementary structuring, the call for external investment, which adds a higher layer of complexity and risk. She is interested in another type of company asset, which is receivables. These receivables may be on debtors who have better risk qualities than the company. The principle is to study the company’s pool of receivables, possibly to structure it by risk qualities, and to use it to finance itself at a lower cost. The structuring at this point also involves an appeal to external investors, which requires these debt funds to be rated. This also adds an element of risk. Securitization has had its excesses, but today it is once again a financing option that can be offered.

What opportunities does structured finance represent for a company?

Structured finance represents two types of opportunities for a company: access to financing on the one hand, and the possibility of borrowing at a lower cost on the other. Access to finance means that we no longer lend only to the rich: we also lend to companies that need it, and that are able to mobilize assets or contracts for this financing. Theoretically, a company that has a firm purchase and resale contract, with a margin, can finance its activity with very little equity. This is the case of trading companies for example. The second major interest may be to lower the cost of financing. It was the securitization schemes, which were complicated in 2008 due to a liquidity crisis, and the technique used to lower the cost of financing, which was the use of external investors, was blocked. But there is a new law that passed on securitization in 2015 in Europe, which re makes this product, a product of the future. The only downside is that the injections of liquidity by central banks into the economies of European countries make this a little less attractive, because the lowering of the cost of financing by calling on investors is a little lower. But as rates rise, there will be interest again.

What pitfalls to avoid?

There are two pitfalls to avoid. The first is not understanding the risk. The second is not to set up a competition between the players for structuring, which would then reduce the interest which is to lower the cost of financing. Understanding the risk is very important. The structures are set up by banks that analyze the risk, but it is imperative that the company understands the risks it is taking through this structure. This must be analyzed by the accounting or financial manager. Otherwise, the company may take unwise risks. This is what happened in 2008 with toxic loans, which were variable-rate loans indexed to an activity that was disconnected from that of the company. These credits are no longer available. These loans were mainly marketed to local governments, which found themselves indexed to things that were totally disconnected from their business cycle, which was a problem. The first point is to analyze the risk and to have people in the company who are sufficiently familiar with the subject to understand the levers that are in place. The second point is to put the players in competition with each other, because a structured financing offers a minimum size, and there are important structuring costs. There can be a middle office, which can follow the operations. Thus, these costs must be amortized over a minimum size of financing. If there is no competition, the fees may be too high.

Once these two pitfalls have been avoided, structured finance is still the way of the future for enterprising people.

The interest of interim management

Calling on an
interim management firm
to set up a mission in the banking – finance – or insurance sector, by a specialized manager, can be a solution and a considerable advantage for the company. The interim manager specialized in financial services can act on many niches:

  • General or departmental management
  • Support for a regulatory or commercial transformation
  • Setting up a reporting system
  • Operational department management (Back, Middle Office, Risk)
  • Financial risk policy management / compliance

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