Guide Navigation

1. Credit Enhancement
2. Sale of Future Cash Flows
3. Covered Bonds
4. Securitisation Fundamentals
5. Tranching Techniques
6. Commercial Mortgage-Backed Securities
7. Hybrid Debt Instruments
8. Work With Us

1 · Credit Enhancement

1.1 Plain-Vanilla Loan vs. Enhanced Structure

In an ordinary corporate loan the lender prices purely for borrower default risk. Once covenants erode or leverage spikes, margin ratchets kick in and access can disappear overnight. By contrast, credit enhancement injects external support—collateral cushions, third-party guarantees or structural protections—shifting repayment risk away from a single balance sheet. Rating agencies assign uplift, investors accept tighter spreads, and issuers access bigger advance rates.

1.2 Internal vs. External Enhancements

Mechanism	How It Works	Typical Users
Over-Collateralisation	Assets pledged exceed note principal (e.g., 120 % loan-to-value cap)	ABS shelves, equipment lease platforms
Excess Spread	Net asset yield minus note coupon funds reserve for losses	Credit-card trusts, auto ABS
Reserve Accounts	Cash funded at closing or via spread trapping; covers interest shortfalls	Buy-here-pay-here auto lenders
Third-Party Guarantees	Bank LOCs, insurance wraps, multilateral guarantees	Project finance, EM sovereign deals

1.3 Third-Party Guarantees & Legal Analysis

When an A -rated bank or insurer steps behind a transaction, noteholders rely on the guarantor’s balance sheet—not the originator’s. Counsel must assess: (i) enforceability under local and New York law; (ii) ranking vis-à-vis other senior creditors; (iii) automatic-stay carve-outs if the guarantor files for bankruptcy. Cross-border deals often deploy payment undertakings governed by English or New York law to avoid uncertain domestic courts.

1.4 Partial Guarantees — Cost-Efficient Uplift

A 20 % principal wrap during the construction phase of a power project may lift the entire deal two notches—yet cost only a third of a full wrap. Rating models treat the partial guarantee as first-loss coverage; once commercial operations stabilise the guarantee can drop away.

1.5 Key Rating Drivers

• Guarantor’s issuer rating and outlook.
• Trigger events forcing replenishment of reserves.
• Legal priority of guarantee versus operating liabilities.
• Ability to accelerate payments to match note amortisation.

2 · Sale of Future Cash Flows

2.1 Transaction Architecture

A future-flow securitisation monetises receivables that will be generated after closing—airline ticket sales, mobile-phone minutes, oil-export revenues. The originator grants an absolute assignment of the receivables to an offshore special-purpose vehicle (SPV). Collections sweep through lockbox accounts controlled by a trustee. If the originator defaults, the cash flows continue to the SPV, insulating investors from bankruptcy.

2.2 Benefits for Emerging-Market Issuers

• Rating uplift: Future-flow notes can pierce the sovereign ceiling where payors and collection accounts are offshore.
• Tenor extension: Investors accept 10- to 15-year terms because diversion triggers protect cash flow.
• Non-recourse: Debt sits off balance sheet, conserving headline leverage metrics.

2.3 Credit Due Diligence Checklist

Analysts model at least five years of history, stress volumes at β = 2 of GDP volatility, and haircut prices or tariffs. Legal counsel issues a true-sale and security-interest opinion under both originator and SPV jurisdictions.

2.4 Performance Risk

Unlike asset-backed deals, investors depend on the originator continuing to generate flows. Mitigants include: bullet diversion triggers, minimum distribution covenants, sponsor replacement mechanics and off-taker substitution clauses.

2.5 Asset-Backed vs. Future-Flow — Quick Compare

Dimension	Asset-Backed	Future-Flow
Collateral	Static or revolving pool	Production of future receivables
Prime Risk	Asset default/prepayment	Originator continuity
Common Tenor	3–7 years	5–15 years

3 · Covered Bonds

Covered bonds marry on-balance-sheet funding with dual recourse. Investors hold a statutory claim on both the issuer and a dynamic pool of high-quality mortgages or public-sector loans. European bank treasurers prize covered bonds for two reasons: (i) the structure delivers AAA ratings even if the bank sails at BBB; (ii) the assets continue to accrue on the bank’s book, preserving customer relationships and mortgage servicing fees.

4 · Securitisation Fundamentals

4.1 What Is Securitisation?

Securitisation converts illiquid receivables—auto loans, credit-card balances, mortgages—into tradable notes by transferring the assets into a bankruptcy-remote SPV that issues securities backed solely by those cash flows.

4.2 Why Issuers Securitise

• Funding cost: Triple-A tranches can price 75–150 bps inside unsecured corporate curves.
• Capital relief: Banks free risk-weighted assets, subject to retention rules (EU: 5 % minimum).
• Matched duration: Tenor matches asset lives; no rollover risk.
• Diversified investors: Attracts insurance, pension, and money-market buyers.

4.3 Instrument Families

ABS(auto, equipment, credit-card), RMBS(residential mortgages), CMBS(commercial mortgages), and CLOs(leveraged loans) account for 90 % of global issuance. Niche pockets include royalty securitisations (pharma, music) and cellular-tower cash flows.

4.4 Step-By-Step Deal Flow

1. Originator sells assets to SPV at par (true sale).
2. SPV issues senior, mezzanine and equity notes.
3. Trustee oversees waterfall and covenant triggers.
4. Servicer collects receivables, passes to paying agent.
5. Investors receive principal and interest per priority of payments.

4.5 Who Does What?

Party	Primary Role
Originator	Generates and sells assets; often remains servicer
SPV/Issuer	Holds assets, issues notes, bankruptcy-remote
Trustee	Monitors cash waterfall, enforces covenants
Rating Agency	Sizes credit enhancement, surveillance
Swap Provider	Hedges rate or FX mismatch, posts collateral

4.6 SPV vs. Direct Assignment

A direct-assignment sells receivables straight to investors—simple but limits layering of tranches. An SPV route enables multi-class notes, revolving periods, excess-spread mechanics and easier ratings.

4.7 CRISIL Risk-Evaluation Framework

• Asset Risk (50 %) — default probability, recovery lags.
• Originator/Servicer (20 %) — vintage performance, systems, back-up servicing.
• Structure (20 %) — enhancement levels, triggers, legal isolation.
• Counterparty (10 %) — account bank, swap and guarantor ratings.

4.8 Principal Transaction Risks

• Credit risk: Borrower defaults erode excess spread.
• Prepayment risk: Fast pay-downs shorten note lives, cut coupon carry.
• Interest-rate risk: Asset yield/funding mismatch without adequate hedges.
• Legal risk: True-sale challenge, tax-withholding on cross-border deals.

5 · Tranching Techniques

5.1 Introduction

Tranching carves cash flows into slices with different maturities, priorities and risk profiles—transforming a single pool into securities tailored for money-market funds, insurance portfolios and yield-hunters alike.

5.2 Credit-Risk Tranching

The equity piece absorbs first losses, mezzanine covers the next layer, and senior notes ride on the cushion. Enhancement sizing aims at target default tolerances (e.g., AAA requires surviving a 2,500 bps cumulative loss for U.S. subprime RMBS).

5.3 Time & Prepayment Tranching

Sequential-pay structures retire Class A-1 first, shortening its weighted-average life and catering to conservative investors. Planned amortisation classes (PACs) stabilise cash flows under a band of prepayment speeds (e.g., 100–300 % PSA), shifting variability to support bonds.

6 · Commercial Mortgage-Backed Securities (CMBS)

6.1 What Makes CMBS Different?

CMBS pools 30–200 fixed-rate, non-recourse commercial mortgages—office, retail, hotel, logistics. Loans balloon at year 5, 7 or 10, creating refinance risk. Investors rely on diversification and structural triggers (DSCR tests, lockbox sweeps) rather than personal guarantees.

6.2 CMBS vs. Lease-Rental Discounting (LRD)

Dimension	CMBS Pool	LRD Single Asset
Collateral	Multi-borrower, cross-collateralised	One income-producing property
Loan Structure	Fixed-rate, non-recourse, balloon	Floating or fixed, amortising
Investor Market	Institutional bond buyers	Banks/NBFCs
Liquidity	Benchmark issues trade daily	Hold-to-maturity

7 · Hybrid Debt Instruments

7.1 Debt vs. Equity Continuum

Fixed maturity, enforceable coupons and collateral swing an instrument toward debt. Perpetuity, discretionary distributions and loss-absorption tilt toward equity. Hybrids live in between, offering issuers tax-deductible coupons and investors equity-like upside.

7.2 Common Hybrids & Balance-Sheet Treatment

Instrument	Key Features	Accounting View (US GAAP)
Preferred Shares	Non-voting, fixed dividend, perpetual	Equity
Perpetual Subordinated Notes	No maturity, coupon deferral	Hybrid/Tier 1
Convertible Bonds	Fixed coupon, equity option	Liability + embedded equity
Contingent Convertibles (CoCos)	Automatic equity conversion at trigger	Loss-absorbing capital

7.3 Assessing Equity Content (Rating-Agency Lens)

• Perpetuity: No step-up or fixed maturity > 60 years.
• Coupon deferral: Must be fully discretionary and cumulative.
• Loss absorption: Deep subordination with no acceleration rights.
• Replacement language: Issuer commits to replace called hybrids with equal or higher equity content.

Work With FG Capital Advisors

Whether you are sizing a partial guarantee for a BBB/BBB- infrastructure project, exploring a future-flow oil-export securitisation, or carving mezzanine and PAC tranches for a €400 million RMBS, FG Capital Advisors can build the structure, model the cash flows and run competitive placement with over 120 active desks. Email contact@fgcapitaladvisors.com and our structured-finance team will send a bespoke term-sheet checklist within two business days.