Structuring Securitized Bonds

This chapter concentrates on the study of cash flow structuring, an essential aspect of securitization. The cash flows from the assets in a securitization are allocated to various bonds, following particular rules. These rules allow for the creation of bonds that have better, or worse characteristics than the underlying collateral. We first discuss the underlying logic of structuring and the broad tools of the trade. Then, we offer a simplified taxonomy of structure types, and in the subsequent sections go through these various methods. These include subordination, over-collateralization, sequential payments, and many others. We also address how different types of structuring approaches are usually combined in a securitization, and cover a few examples. We explain the logic with which various layers of structures are applied. We provide simple algorithmic descriptions of most of the structuring techniques we discuss, and we measure their efficiency across a large range of simulated scenarios.