Structured Debts

The term structured debts is used to refer to a variety of extremely complex debt financing arrangements which are far more elaborate in character than traditional debt financing arrangements such as bonds, IVA etc. In the case of IVA only the best IVA Company is hired to deal with the situation.

Many structured finance arrangements involve transforming one kind of debt into another, more subtle form of debt. Often this involves the creation of a new corporate entity to act as holder of the new, transformed form of the debt. Such arrangements have the effect of dissociating or insulating the original owner of the debt in its initial form from the risk associated with it. Sometimes this dissociation from risk may be perceptual only, i.e. the underlying exposure may be no less great but, because of the opaqueness of many structure finance arrangements, this may not be apparent to outside observers. Since outside observers, through their buying, selling and rating arrangements, often exert a significant effect on a company’s bottom line, this perceived change in risk can result in real changes in the company’s bottom line.

Some financial commentators believe that structured financing arrangement, because of their lack of transparency, have the potential to create confidence problems in financial markets. Because lenders and investors cannot be certain of their true exposure to risk when they commit themselves to a particular company, they may simply play cautious and refrain from doing so, causing the wellsprings of credit to dry up.