Structured Finance

Comprehensive coverage of all major structured finance transactions

Structured Finance is a comprehensive introduction to non-recourse financing techniques and asset-based lending. It provides a detailed overview of leveraged buyouts, project finance, asset finance and securitisation.

Through thirteen case studies and more than 500 examples of companies, the book offers an in-depth analysis of the topic. It also provides a historical perspective of these structures, revealing how and why they were initially created. Instruments within each type of transaction are examined in detail, including Credit Default Swaps and Credit Linked Notes. A presentation of the Basel Accords offers the necessary background to understand the regulatory context in which these financings operate.

With this book, readers will be able to:

• Delve into the main structured finance techniques to understand their components, mechanisms and how they compare
• Understand how structured finance came to be, and why it continues to be successful in the modern markets
• Learn the characteristics of financial instruments found in various structured transactions
• Explore the global context of structured finance, including the regulatory framework under which it operates

Structured Finance provides foundational knowledge and global perspective to facilitate a comprehensive understanding of this critical aspect of modern finance. It is a must-read for undergraduate and MBA students and finance professionals alike.

Preface xix

Introduction 1

A Brief History of Structured Finance 1

Defining Structured Finance 4

Why was Structured Finance Set Up? 6

PART I Leveraged Buyout (LBO) 13

CHAPTER 1 What is an LBO? 15

1.1 The Main Features of an LBO 15

1.2 A Three-step Leverage 17

Case Study 1: The Harley-Davidson LBO (1981-1986) 22

CHAPTER 2 The Different Stakeholders 26

2.1 The Target Company 26

2.2 Buyers 35

2.3 Lenders 40

Case Study 2: Michael Milken and the Birth of the High-Yield Bond Market 47

Case Study 3: Malcolm Glazer and the Manchester United LBO 53

CHAPTER 3 The LBO Process 63

3.1 The Sale Process 63

3.2 Exit Strategies 72

3.3 LBO and Private Equity 77

Case Study 4: Hilton Hotels LBO, the Most Profitable Private Equity Deal Ever 85

Summary LBOs: What Have We Learnt? 92

PART II Project Finance 95

CHAPTER 4 The ABC of Project Finance 97

4.1 Definition 97

4.2 Why Choose a Project Finance Structure 99

4.3 Constraints of the Project Finance Structure 103

4.4 How to Choose between Corporate and Project Financing 103

Case Study 5: The Construction of the Eiffel Tower 105

CHAPTER 5 The Main Parties to Project Financing 110

5.1 Different Types of Projects 110

5.2 Sponsors 117

5.3 Lenders 127

5.4 The Role of Public Authorities 140

Case Study 6: The Near Bankruptcy of Disneyland Paris 142

CHAPTER 6 Project Finance Structuring 149

6.1 Preliminary Analysis of the Project 149

6.2 Project Finance Legal Structure 156

6.3 Financial Structure 166

Summary Project Finance: What Have We Learnt? 173

PART III Asset Finance 175

CHAPTER 7 Definition of Asset Finance 177

7.1 The Scope of Asset Finance 177

7.2 How to Finance Assets 178

Case Study 7: Richard Branson and the Beginnings of Virgin Atlantic 196

CHAPTER 8 The Stakeholders 200

8.1 Clients 200

8.2 Lessors 210

8.3 Lenders 222

Case Study 8: The Rise and Fall of GPA Group, the First Giant Aircraft Leasing Company 230

CHAPTER 9 Behind the Scenes 238

9.1 Inside a Leasing Company 238

9.2 Legal Considerations 243

9.3 The Dynamics of Leasing Markets 250

Summary Asset Finance: What Have We Learnt? 254

PART IV Securitization 255

CHAPTER 10 The Securitization Process 257

10.1 Transforming Illiquid Assets into Liquid Securities 257

10.2 Tranching of Securities 258

Case Study 9: The Securitization of David Bowie's Intellectual Property Rights 264

Case Study 10: What is a Covered Bond? 267

CHAPTER 11 The Different Stakeholders 272

11.1 Borrowers 272

11.2 The Originator 274

11.3 Around the SPV: The Transaction's Life 276

11.4 The Investors 280

Case Study 11: The Subprime Crisis 285

Case Study 12: Michael Burry's Big Short 294

CHAPTER 12 Structuring a Securitization 299

12.1 Composition of the Collateral 299

12.2 Managed Transactions 302

12.3 Additional Structuring Considerations 311

Case Study 13: Whole Business Securitization 324

Summary Securitization: What Have We Learnt? 327

Conclusion 329

Structured Finance: What Have We Learnt? 329

A Comparison of Various Types of Structured Finance 330

What is the Future for Structured Finance? 332

Appendix A How Banks Set Interest Rates 336

Appendix B Syndication and Club Deals 341

Appendix C Credit Derivatives 347

Bibliography 350

Acknowledgments 354

Index 357

Charles-Henri Larreur is an investment banker specialized in structured finance and debt advisory. He is currently a professor at HEC Paris. He holds a Msc in Management from HEC Paris, a Msc in Public Affairs from Sciences Po and a BA in History from Sorbonne University.

A comprehensive coverage of all major structured finance transactions

The author wrote this book to share his passion for structured finance. What is structured finance? Broadly defined, it is a combination of financial tools that are not off-the-shelf. It is an exciting mix of financial expertise, the occasional use of exotic financial instruments, and the unlimited use of one's imagination. It is a collection of tools creatively put together to make large, complex projects possible. Projects that otherwise would never have been financed. Without it, Gustave Eiffel would never have found the funds to build the Eiffel Tower, Richard Branson would never have started Virgin Atlantic, and Malcolm Glazer would never have bought Manchester United.

Structured finance is a powerful engine for global growth. Readers will find in this book real-life examples showing the impact of structured finance all over the world, on all kinds of businesses. Bike lovers can see how structured finance gave Harley Davidson a second life. Those of you longing for a greener world can see how it helps the energy transition. And if you have a passion for donuts, you can see how it allowed for a restructuring of Dunkin Donuts. From leveraged buyouts to project finance, from securitization to asset finance, structured finance is the unseen beating heart of the global economy.

Structured finance is also a set of complex debt products. The author analyzes in this book each of the main structured finance techniques and the rationale behind them. He covers the reasons why bankers came up with these financing tools and how the tools differ from each other. He also details the opportunities that structured finance offers companies and banks within the context of regulatory constraints like the Basel Accords. Finally, he shares an analysis of the most recent market trends, highlighting the growing importance of Credit Default Swaps and Credit Linked Notes and explaining how equity and debt funds are reshaping the global financial system.