- Put-Call Parity
- Forwards vs Futures
- Cash Settlement vs Physical Settlement
- Backwardation vs Contango
- Residual Risk
- Best Futures Books
- Futures vs Options
- What are Options in Finance?
- Options Trading Strategies
- Call Options vs Put Options
- Options vs Warrants
- Writing Call Options
- Writing Put Options
- Options Trading Books
- International Option Exchanges
- Interest Rate Derivatives
- Interest Rate Swap
- Equity Strategies
- Swaps in Finance
- Embedded Derivatives
- Commodity Derivatives
- Commodity Risk Management
- Managed Futures Strategy
- Top 7 Best Books on Derivatives
- Structured Finance Jobs
- Commodities Trading Books
- Best Commodities Books
Structured Finance Jobs (Career)
There are dozens of career choices that one contemplates before finally deciding what it should be. We like to test our choices and preferences before taking that big plunge in applying for a job. It indeed is the right thing to do, when today we have varied options and also correct sources to find out whether it suits our personality.
Previously on this blog, we have looked at some of the most famous job options Hedge Fund Jobs , Project Finance Jobs. Here, we are going to explore one of the niche segments in the finance job industry such as the structured finance jobs.
If you search the web you would find a lot of descriptions on what structured finance is and what people usually do there.I thought of learning all about it myself and sharing it with you guys here.
Through this securitization job guide, we will look at the following points to give you a head start for the structured finance career;
- What is Structured Finance?
- How does structured finance work?
- What is included in Structured Finance Jobs?
- What is Credit Enhancements in Structured Finance?
- Are you fit for Structured Finance Job?
- How is the culture like at structured finance jobs?
- Structured Finance Jobs Salary
- Guidelines for Getting Hired
You may think that I have mistakenly used the word Securitization instead of structured finance in the earlier paragraph? Just for you to know, in practice these two words are quite synonymous and in most cases references to structured finance mean securitization. However, structured finance transactions have a much broader scope, in which securitization is considered to be a dominant form.
What is Structured Finance?
Structured finance is a segment in finance which has been created in order to transfer risk using complex financial arrangement. It is called structured because the securities under these financial transactions are secured i.e. they are backed by collateral.
These financial services are provided by large financial institutions which cater to unique financing needs of a company which cannot be met by conventional loans. Most commonly used structured financial instruments include Asset-backed securities (ABS) and Mortgage-backed securities (MBS).
As the name goes an asset-backed security is a security whose value and payments are backed by a pool of underlying assets – for example- auto loans, home equity loans, student loans.
A mortgage-backed security is a subcategory of ABS where the security signifies a claim on the cash flows from underlying mortgage loans.
How does structured finance work?
This might get a bit technical for you, but it is important to understand what actually happens in structured finance.
In these financing transactions companies basically sell their rights to payments they get under mortgage loans, accounts receivable or any such assets which have constant cash flows to a trust or the special purpose vehicle (SPV). The aim of doing so is basically to separate those financial assets from the risks that a company is generally associated with. The company will then use those assets to raise funds from the capital markets at a lower cost than if the company, with its associated risks, had borrowed the funds.
The SPV, on the other hand, is responsible for “bundling” the assets into a pool. This pool of assets is then sold as securities to investors that will meet their needs and risk preferences.
What is included in Structured Finance Jobs (Career)?
- Positions in structured finance jobs include creating financing vehicles to redirect free cash flows to investors through ABS and MBS.
- Under structured finance jobs, you would be helping companies raise capital by creating “secured” securities and then selling them to investors.
- The work generally revolves around those companies which have stable cash flows in their business models such as the credit card, student loan, and credit card companies. It all boils down to the frequency of cash flows those securities have and how appealing can they be made in terms of packaging them differently.
- The structured finance (SF) group could typically include investment bankers, traders, and sales team. As a Structured Finance Banker, you would be responsible to kick start the entire process wherein you pitch clients to issue MBS and ABS notes. Once the deal is done, deal structuring is completed with the help of the rating agencies and legal team. Meanwhile, continuous update is taken from the sales team regarding certain types of ABS from investors. As a Structured Finance banker you would also coordinate with the traders regarding the information on issuer’s outstanding notes that might be trading so that you get a hint on the new issue pricing.
- Creating a pitch is similar to that of Investment banking, only that there could be more information in terms of the spread, tenor and ratings of the bond, rates that the competitors are pitching and showing how the collateral underlying structured notes are performing in terms of credit quality.
- There is some deal work that needs to be done which will usually involve all administrative work such as the creation of deal time table, coordinating with the legal team and rating agency team.
- Then comes the part wherein you need to structure the deal i.e. come about with the credit enhancements and then create necessary marketing support in order to present the same in roadshows to explain the potential investors.
What is Credit Enhancements in Structured Finance?
It is important that at this stage you understand the meaning of this term credit enhancement. There are two approaches for credit enhancement-
Let’s take this hypothetical example- in case you have a pool of student loan worth $150 and you are offering the investors it at $100. This is known as over-collateralizations. It basically creates a cushion against any reduction of value in the underlying assets.
Another approach for credit enhancement is subordination which means that there are bonds with multiple classes with most senior to the most junior tranche. For example, if a bond has three tranches X (senior). Y and Z (junior or subordinated). Subordinate bond Z would be allocated losses in case they occur before allocating the senior bond (X). Thus, this too provides credit enhancement.
- Once the roadshow is done as Structured Finance bankers, you would spend some days marketing the deal from the launch through pricing with the clients.
- You will have to continuously monitor the markets it is very important to know what would be the correct time to launch a deal so that yours get the maximum attention.
- As a structurer you will have to work on advanced modeling to calculate the cash flows, use your quantitative skills and calculate the probability of defaulting borrowers on the mortgages and loans.
- Thoroughly examine the issues and nuances of a transaction to know what would be its outcome, carry out economic modeling and also how various factors could affect the cost and prices of the deal.
- There is a lot of diversity to the deals. There are a number of transactions that are managed at a point of time and none of the deals is alike.
Are you a good fit for structured finance jobs?
- Structured finance jobs are different from the traditional kind of Investment banking, hedge funds, and private equity analyst ones. Incase those are the jobs that allure you more then I would suggest stay away from Structured Finance.
- If you are honestly inquisitive as to how companies raise funds using structured finance and are creative enough to work around those instruments, structure the securities well, you would surely fit in the structured finance jobs.
- You need to ensure that the deals are appealing to the investors and at the same ensure that the company’s concerns are met while doing so.
- You should be someone who follows the market well and is interested in applying the same to your work.
- MBA or CFA is not a necessity. People with even graduate degrees get into structured finance jobs and at times you tend to get promoted much quicker than other finance professions.
- It’s better if you have a strong quantitative background along with the finance know how.
- The skills that you would require for structured finance jobs would be innovation, analytical skills, verbal and communication skills, sector knowledge, good networking skills as you will have to pitch a lot of unusual ideas to companies.
- Industry acquaintance is vital as structured finance analyst usually tend to specialize in an area, such as oil and gas or power project finance.
- Be someone who self-motivated to perform and willing to learn.
How is the culture like at structured finance jobs?
Structured Finance Career – Working hours
- You might have to get in early (around 7.00 am) at the office for market update calls.
- Sometimes while working on the deals you might have to work until mid-night since you would have complete a set of work before the next day.
- Working on a weekend is not as often as in case of investment banks and only when you need to get something done in a case of live deals or preparing a pitch book. Compare this with Investment Banking Lifestyle
- An average number of hours that you would usually work is somewhere between 12-14 hours.
Structured Finance Career Hierarchy
- Usually, the organization structure for the structured finance groups is flat.
- As a structured finance analyst, you would accompany your directors and managers for lunch and discuss work with them.
- However, this does not mean they would dither from giving you a pile of work on Friday evening which is due on Monday! 😀
Structured Finance Career Exit Opportunities
- The exit opportunities from structured finance job may not be as glamorous as in the case of investment banking at times. You could get to work in a company with a finance role to help them raise funds for their business using securitized products.
- Also, you can work for insurance companies and asset management firms that invest in structured notes.
- For investment bankers getting a switch in private equity could be an option but here the chances are low unless you have such expertise or prior experience of working in those sectors or deals.
- There are opportunities available in the hedge funds (HF)/investing side but not with the traditional Hedge Fund strategies.
Structured Finance Jobs Salary
Structured finance jobs are a very niche area and their revenues are also smaller compared to the other finance biggies. Considering the junior analyst level positions, the pay is what you would expect at any other investment banking firm. For the senior levels, it does get better.
The fees differ depending on the type of the deal. This is very similar to hedge funds and M&A IB group wherein fees will reflect the size of the deal, how risky and difficult it to get the deal done. The amount of fee that would come from the traditional auto/student loan deal which is less risky is small. For the deals which are more customized would charge a higher fee from the clients.
Have a look at the below graph to know the average salary of a structured finance analyst job and the salary trend.
Few guidelines for Getting Hired for Structured Finance Job
I am sure you would want to see yourself viewing these words! Let me give you a few guidelines which could help you get your structured finance job.
- Getting yourself recruited at a structured finance group is nothing different than any other job hunting. Also since such firms are comparatively less you will have to go through tons of cold calls, resume submissions, and use your networking schemes.
- The questions you find being asked at the interviews would be majorly based on accounting, financial modeling and relative valuation like PE Ratio, Price to Book Value etc
- You need to be very well versed with what structured finance means and related catchwords like the one we saw earlier “securitization”. You should know about the kind of assets that get securitized, which ones should be selected and which ones not.
- Many times the selection procedure at Structured Finance jobs are concentrated on few B-Schools although that does not mean if you are coming from other institution you won’t be selected. What counts is your interest, knowledge, practical experience in that field.
- You should also have complete clarity as to why you want to get into this field. So have good reasons for answering such questions well, wherein the recruiters want to test your intellect, interest and curiosity.
- Very few people know about this arof in finance so you can give yourself an edge over them by reading and understanding about this structure and start networking.
Structured finance jobs are highly beneficial to those who have a solid blend of the spreadsheet, accounting, and legal skills. While considering them, you need to know well as to how the economy has been performing and how the structured finance market is doing as a whole. Judging your success in this field in no rocket science and will largely be dependent upon whether you enjoy doing the hard work, follow the market and make deals happen. Plus the pay you get for this structured finance job will have to be satisfactory as against the job you perform. If you wish to exit the Structured Finance industry and join either Private Equity/Hedge funds, ensure that you have the necessary credentials and experience of working on such deals which would make the exit smooth then.
This has been a guide to Structured Finance Jobs and Careers. Here we discuss what is included in structured finance job as an anaylst, their roles and responsibilities, job description, hierarchy. Also, we discuss structured finance jobs salaries and tips and tricks to get hired. may also learn more from the following articles-
- Why is Junior Tranche Used?
- Project Finance Jobs
- Corporate Finance Career Path | Top 9 Jobs You Must Explore!
- Hedge Fund Jobs