|"Structured finance" refers to the issuance of securities that are specifically designed and structured to meet the needs of end investors and/or securities issuers. "Structured Insurance" (also known as alternative risk transfer) refers to the process by which corporations integrate risk management solutions into their traditional corporate financing activities. Both concepts refer to the part of the global financial market in which securities, derivatives, and insurance converge.
The course begins with a review of basic corporate finance theory and how structured finance and insurance fit into that theory. We will also discuss the fundamentals of insurance, reinsurance, financial guaranty, and credit derivatives markets - all of which are essential for understanding the rest of the course.
The remainder of the class will explore the main products and processes in the structured finance and insurance worlds. Our discussions will include:
asset-backed and residential mortgage-backed securities; cash and synthetic collateralized debt obligations (CDOs); leveraged syndicated loan markets and collateralized loan obligations; project and principal finance; insurance-linked notes (including natural catastrophe bonds); captives and protected cell companies; multi-line/ multi-trigger programs; and contingent capital facilities.
We will discuss the credit crisis where relevant in the course - why it happened, what products and markets were affected, and how it will impact the future of structured finance and structured insurance. We will focus on the structured finance and insurance products that have survived the crisis, and will de-emphasize products that (for now, at least) are considered “dead.”
This course will not be heavy on mathematics or analytics and is not primarily an asset pricing, cash flow modeling, or financial engineering course. Our perspective instead will be highly institutional (including legal, tax, accounting, etc.) and product-oriented. The goal is for you to understand the basic functions, benefits, and risks of structured finance and insurance against a framing and unifying backdrop of the theory of corporate finance. You will also learn how to read and digest documents like offering circulars, prospectuses, and rating agency guidance for the relevant products and structures.
The class should appeal primarily to those interested in structured products and insurance on the sales and structuring side (banks, reinsurance companies, derivatives dealers, etc.), and on the issuer side (corporate finance and treasury operations and risk management). Although a lot of insights can be gained from the class for prospective investors in these products and structures, we will not delve deeply into how these financial instruments fit into broad portfolio management strategies. Auditors, consultants, and other external parties that evaluate structured finance and insurance products will also be interested in the course materials.
|SAMPLE EXAM QUESTIONS:
1. T/F/U–Purchasers of ABCP from a single-seller conduit are exposed only to the credit risk of one obligor, whereas purchasers of ABCP issued by a multi-seller conduit are exposed to the credit risk of multiple obligors.
2. T/F/U—The TABX.HE.07-1.06-2.BBB-.0-5 is economically equivalent to the mezzanine tranche of a synthetic mezzanine ABS CDO.
3. Suppose Reference Entity XYZ has $100mn of debt outstanding. Suppose further that $600mn of CDS protection has been sold on this debt, of which $50mn is cash-settled and $550mn of protection is physically settled. Suppose an auction is not held following XYZ’s bankruptcy filing. T/F/U—Purchasers of protection in the $50mn cash-settled CDSs do not bear any risk arising from the excess of physically settled CDSs vis-à-vis the actual deliverable bonds.
Please read the S&P Report on Mariah Re Ltd. and answer the questions below based on that report.
4. [5 points] What are the three major sources of credit risks considered by S&P in rating the notes, and how does S&P’s final rating depend on those three sources of credit risk?
5. [5 points] What is the estimated probability (as of the date of the S&P Report) that the principal amount of the bonds will begin to be eroded between January 1, 2012, and December 31, 2012?
6. [5 points] Suppose the principal of the bonds has been eroded to $35 million as of December 21, 2013, and a new covered event occurs. What happens to the maturity and interest rate payable to investors in the bonds?
SAMPLE PROBLEM SET QUESTIONS:
Please read the attached S&P report on Ras Laffan and answer the questions below based on that report.
1. [5 points] What is the purpose of the Debt Service Coverage Ratios (“DSCR”) in this structure (i.e., what kind of risks are managed through the DSCR)?
2. [5 points] Briefly describe the Sales & Purchase Agreement (“SPA”) between Ras Laffan and Kogas.
3. [5 points] If Kogas exercised its right under the SPA to defer its maximum permissible amount of deliveries, what does S&P project would be the minimum DSCR of the structure? Explain in words what that number means. (For example, if the number is 999, explain what “999” means in plain English.)
4. [5 points] What conditions must be met before the sponsor can withdraw excess cash from the structure? What specific institution makes the decision when those conditions have been met?
5. [10 points] What are three of the most significant risks to the Ras Laffan project note holders associated with the Kogas SPA?
6. [10 points] Explain how the ExxonMobil guaranty works. Is this a liquidity or credit enhancement, or both? If it is a credit enhancement, for what party or parties is it an enhancement?
Description and/or course criteria last updated: 07/2012