Chapter X, A. The Fundamentals of Structured Finance

• Jurisdiction: United States

A. The Fundamentals of Structured Finance

Structured finance transactions are founded upon corporate separateness as a form of credit protection. Fundamental to the transaction is the creation of a special purpose entity (SPE).³³⁹ Assets used as collateral for a financing transaction are transferred to an SPE to separate the credit risk associated with the current owner from the credit quality of the assets.³⁴⁰ "Structured financings are based on one central, core principle: A defined group of assets can be structurally isolated, and thus serve as the basis of a financing that is independent as a legal matter, from the bankruptcy risks of the former owner of the assets."³⁴¹

A structured financing provides a lender with the comfort that it will recover on a debt. For example, the SPE's organizational documents typically restrict it from engaging in any business unrelated to the financing. This reduces the likelihood that the SPE will become insolvent by engaging in unanticipated business activities.³⁴² As a newly formed entity, the SPE is also less likely than the prior owner of the assets to be subject to claims of preexisting creditors.³⁴³

A structured financing is designed to eliminate other bankruptcy risks as well. SPEs are usually structured to be...