4.03.2006

MISC: Strucutred Finance/Securitization, Corporate Finance and Project Finance

Vault.Forum - I'm considering working in a securitized products group at DB (ABS or CMBS) this summer... Is the pay at the higher levels comparable to that in banking? Also, exit opps? I hear that most people stick with securitization work, but if I wanted to leave after the summer (or just didn't get an offer), where would the skills I learn be transferrable? Banking, research, trading?

Structured finance is a specialized field and you are right that most people stay in it. Trading, research, and syndicate are all transfer options down the road. Switching to other fixed income products (particularly on the credit side) is much more likely than a switch into banking. If you do MBS, you can seek out other positions in the real estate industry...

A lot of people don't know what structured finance is. It's not as mainstream as M&A, for example. This is especially true amongst undergrads. My guess is that you see a lot more interest in ABS/MBS and other more esoteric products (CDOs, etc.) amongst business school students.

...it's a specialized area within fixed income. Not everybody likes fixed income, much less structured products. It's also more technical than banking (as is most of fixed income).

...it does not offer the same generalized training that corporate finance does. In corporate finance you touch a little bit of everything but don't really do anything (other than pitch) - the exceptions are the product groups such as M&A and lev fin. Industry groups are there for client coverage purposes (to maintain the relationship). This can be good if you don't know what you want to do, however, as it is generalized and leaves more options open for later.

Best groups - historically Lehman, Citi, and CS (in that order). DB is up-and-coming. but hasn't cracked top three yet. MS is probably after that (but stronger on the real estate side). Of course these shift around from year to year, but the firms I mentioned above are always at the top of the list - especially Lehman and Citi. Lehman is a monster on both the ABS and MBS sides.

When I was speaking about PF, I was referring to arranging financing for large start up single asset projects. Examples, a power plant, a petrochemical plant, an LNG project. Given the start up nature of these projects, there is no track record or general creditworthiness upon which to base the extension of credit.
Generally, then the first step is to compile a risk map of the project. This can be done by looking at a "flow chart" of the project and what needs to be done to get it in place and for it to sell its product. Then one "allocates risk to those best able to bear them". Clearly, once you've done this for a particular type of project, e.g, power plant you can use the same template again and just tweak it for the differences.

Risk allocation is the first step in structuring.

As well, one then uses other devices (e.g., offshore escrow accounts (cash traps), sponsor support, perhaps some form of official financing support (export credit agencies, political risk insurance, finance development agencies), financial covenants, offtake agreements with credit worthy parties, input/supply agreements, tariff agreements with a government entity (for power), etc. etc.

The project's financing can also be strengthened by using different instruments (loans, bonds) and prioritization (secured, senior, subordinated) to build a robust financing structure.

I'd divide these into two broad areas.

  • Advisory: In general the financial advisor (FA) assists the sponsor with the economic model of the project and advises/designs the financing structure (types of instruments, tenors, pricing, financial covenants, required support) and identifies the process and sources of finance. The idea is to come up with a package that the providers of finance bid on.
  • Financing: This is a combination of debt instruments, which as I indicated earlier can vary by type (bank loan, bond), seniority and collateralization, use of supports (insurance, official agency involvement). Official agencies are generally important for overseas projects in the developing world. So, if you're building a petrochemical plant in the PRC (and who among the majors isn't these days), you might build in some export credit agency support since the market might have a problem coming up with a couple of US$ billion for a single project. What you want to do is to look at some projects and see how their financings were structured.

Category: C++ Quant > Finance

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