Structured Finance presentation along with legal aspect

Presentation on structure finance

5. Cash CDOs Synthetic CDOs
Underlying Assets
These are backed by a portfolio of actual debt
securities, such as bonds, loans, or other fixed-income
instruments. The cash flows generated by these
underlying assets, such as interest and principal
payments, are used to make payments to investors in
the CDO.
These are not backed by actual debt securities; instead, they are
structured using credit derivatives, such as credit default swaps
(CDS). In a synthetic CDO, the issuer typically enters intocredit
derivative contracts with counterparties to replicate the cash flows of
a portfolio of reference debt securities. These contracts pay out in the
event of default or other credit events affecting the reference assets.
Risk Exposure
Investors in cash CDOs are exposed to the credit risk of
the underlying debt securities. If there are defaults or
credit downgrades in the portfolio, it can impact the cash
flows available to investors.
In synthetic CDOs, investors are exposed to the credit risk of the
reference assets through the credit derivative contracts. If the
reference assets experience credit events, such as defaults, the
protection sellers (counterparties) are obligated to make payments to
the CDO issuer, which then passes these payments to investors.
Ownership of
Underlying Assets
The issuer of a cash CDO typically owns the underlying
debt securities outright. These securities are placed into
a special purpose vehicle (SPV), which issues the CDO
securities to investors.
In a synthetic CDO, the issuer does not own the reference assets.
Instead, the issuer enters intocredit derivative contracts with
counterparties (usually banks or other financial institutions) who agree
to provide protection against credit events on the reference assets.
Market Dynamics
The performance of cash CDOs is directly tied to the
performance of the underlying debt securities in the
portfolio. Factors such as changes in interest rates,
credit spreads, and credit quality of the underlying
assets can impact cash CDO performance.
Synthetic CDOs can be more complex and may involve more parties,
including derivative counterparties. The performance of synthetic
CDOs is influenced by the credit events on the reference assets and
the creditworthiness of the protection sellers.

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27. Equity
Equity
Debt
Debt
0
10
20
30
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50
60
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90
100
Before Buyout After Buyout
EquityDebt
LBO is acquiring a company using debt financing.
Sponsor(usuallyaprivateequityfirm)financesalarge
portion(60-70%)ofthepurchasepricewithdebtand
therestwithequity
Thetargetcompany'scashflowisusedtorepaythe
debtandalsoforbusinessgrowth.
LBOissuccessfulifthesponsorcangetfinancingand
thetargetcompanygeneratesenoughcashflow.
Investmentbanksplayakeyroleinarranging
financingandprovidingadvisoryservicesforLBO
transactions.

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41. Aspect Traditional Financing Hybrid Financing
Nature of Financing Debt or Equity Combination of Debt and Equity
Obligation to Repay Yes (Debt), No (Equity)
Yes (Potentially), No (Equity
Component)
Ownership and Control
Debt: No Dilution, Equity: Dilution
possible
Dilution possible, but typically less than
pure equity
Risk and returns Fixed Returns with Default Risk Mix of Fixed Returns and Equity Upside
Tax Implications
Potential Tax Benefits (Interest
Deductibility) Variable, Depending on Structure
Flexibility Limited More Flexible than Pure Debt
Purpose and Application
Specific (e.g., Capital Expenditure,
Growth Capital)
Flexible, Suitable for Growth or
Complex Situations

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