Introduction to Structured Finance

CHAPTER 8

Securitized and Synthetic Funding Structures

The accessibility of securitization techniques, together with greater liquidity in the credit derivative market, has given rise to new types of money market funding structures. These vehicles have enabled a wider range of market participants to tap the markets, often with illiquid or untradeable assets being used as synthetic collateral. They also provide a diversified funding source for banks, other financial institutions, and corporations. In this chapter we discuss funding vehicles that are structured as synthetic securitizations in the commercial paper and medium-term note markets. We also discuss a basic funding instrument, the basket total return swap, which is traded under an International Swap and Derivatives Association (ISDA) agreement and termed a credit derivative, but in practice works exactly as a repurchase agreement. We begin with a discussion of commercial paper and asset-backed commercial paper program.

COMMERICAL PAPER

Companies' short-term capital and working capital requirements are usually sourced directly from banks in the form of bank loans. An alternative short-term funding instrument is commercial paper (CP), which is available to corporations that have sufficiently strong credit ratings. CP is a short-term unsecured promissory note. The issuer of the note promises to pay its holder a specified amount on a specified maturity date. CP normally has a zero coupon and therefore trades at a discount to ...