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The Structured Finance Market

Structured finance is a unique form of financing that involves the securitization of assets. Securitization is the process of pooling debt with collateral, such as first mortgages or home equity loans, and then re-packaging the debt as bonds. These bonds may take the form of:

  • Pass-through securities
  • Collateralized mortgage obligations (CMO)
  • Collateralized loan obligations (CLO)
  • Mortgage-backed securities (MBS)
  • Asset-backed securities (ABS)
  • Collateralized bond obligations (CBO)
  • Collateralized debt obligations (CDO)

We invest and have expertise in each of the market segments listed above. Braddock primarily invests in the subordinate classes of residential mortgage-backed securities (RMBS), which are backed by various types of residential mortgages.

 

A Structured Finance Transaction
  In a typical structured finance transaction, the loans or receivables that are pooled by banks and financial companies are put into a trust, and a structure is created in which the cash flows from the underlying loans are directed to various bond classes issued by the trust. Generally the structure incorporates an internal credit enhancement, with a portion of the trust's issuance being subordinate to the remaining balance for credit losses (i.e., the highest rated bonds are credit protected by the lower rated bonds). This means that when a loan defaults and a credit loss is incurred, the lowest rated bond class, or lowest tranche, first absorbs the loss. If credit losses amount to such that the lowest tranche is reduced to zero, the next highest rated tranche will absorb subsequent losses, and so on.

 
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