The majority of the facilities offered by Banks are off-the-shelf products like Overdraft, Term Loans, Loan Against Trust Receipts, Bill Discounting, Cheque Discounting, etc. In addition to these plain vanilla products, Banks offer bespoke financial products that are structured to provide a solution to meet specific financing requirements.
Structured Financing is typically used by companies with comparatively better credit quality and larger size, whereas plain vanilla products are used by small and medium-sized companies.
Structured Facilities are present due to the following reasons:
1. Structured Facilities meet specific financing requirements which otherwise is not possible by the plain vanilla financial products
2. Larger liquidity can be mobilised using structured financing
3. Structured Financing provides a win-win solution for both Bank and the Borrower, as Bank is able to construct a ring-fenced structure to protect their interest and the Borrower is able to mobilise the required funding.
4. Protects the interest of the Bank and the Borrower; it’s restrictive during the initial period and later opens with more headroom for the Borrower on earlier restrictions.
5. The financing is tailored around specific sources of liquidity which allow the Borrower to utilise the other available sources of liquidity.
6. A certain category of lenders looks for watertight lending structures; hence, structured financing provides them an opportunity to participate in financing thereby opening an alternative pool of liquidity.
7. Structured Facilities are competitively priced
Some of the financing requirements wherein the Structured financing is utilised:
1. Project Finance
2. Acquisition Finance
3. Mezzanine Loan
4. Leveraged Buy-Out
5. Real Estate Finance
6. Aircraft Finance
7. Securitisation Structures
8. Bridge Loan
Some of the attributes present in a typical Structured Financing are as below:
1. Ring fenced ownership
2. Watertight structure to capture revenue
3. Pledge on accounts
4. Cash Waterfall Structure
5. Charge on specific assets
6. Sculpted amortisation
7. Debt Service Reserve Account
8. Cash Sweep Structure
9. Financial Covenants
10. Guarantees during the initial period, fall away after certain conditions are met
11. Restrictions on disposals
12. Prepayments linked to certain liquidity events
13. Payment in Kind (PIK) Structure
Structured Facilities have evolved to minimise the transaction risk and make a financing transaction feasible along with challenges related to the company’s financial position and market dynamics.