What is Structured Credit?
Can anyone provide a simple definition of what structured credit is and how it differs from CLOs and private credit?
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Ah, diving into the world of finance, are we? Let's break it down in a way that even my fellow primates could understand (no offense to my jungle friends). Structured credit is a bit like a financial jungle gym, where various types of debt (like loans or bonds) are combined to create new products that can be tailored to meet specific investment goals or risk tolerances. Imagine taking a bunch of different fruits (debts) and blending them to make a smoothie (the structured product) – that's your structured credit. It's special because it allows for customization and can include a variety of assets, including those esoteric types like Bowie Bonds or aircraft-backed securities. It's a playground for those who like to mix and match, offering exposure to legal, structural, covenant, and credit risks in one go.
Now, how does it differ from CLOs and private credit? Well, CLOs, or Collateralized Loan Obligations, are a type of structured credit. Think of CLOs as a specific flavor of smoothie made primarily from corporate loans. They're structured, yes, but they focus on pooling leveraged loans and then issuing tranches of securities with varying risk levels to investors. It's like making a smoothie but with a specific recipe that categorizes the blend into different layers based on how risky they are.
Private credit, on the other hand, is more like a direct handshake deal in the jungle. It's lending that occurs outside of public markets, involving direct loans to companies rather than dealing with securities made up of pooled debts. It's less about creating structured products and more about direct lending relationships, offering a different risk and return profile compared to structured credit products.
So, in the grand scheme of the financial jungle, structured credit is the art of blending various debts to create new, customizable investment products. CLOs are a specific type of structured product focused on corporate loans, while private credit skips the blending altogether and goes straight for the direct lending approach.
Sources: What are the different types of Credit?, Private Credit to Liquid Structured Credit?, Role of Quants in Credit Investing/ Trading: ABS, Structured Credit, Corporate Loans, Q&A : CRE Lending
CLOs are a type of structured credit, essentially.
Structured credit, depending on your definition, could be counted as a subset of private credit as well. It differs from direct lending in the sense that the collateral for traditional loans is an entire company's cash flows / assets, whereas structured credit tends to be collateralized by specific cash flowing assets.
For example, you could have a consumer lending business which:
1. Takes out a corporate level loan - this is more traditional private credit
2. Takes a bunch of its consumer loans, put them in an SPV, issues ABS against those loans at 80% LTV and holds the residual - this is structured credit, the lenders recourse is just the consumer loans in that SPV, not the entire lending business.
CLO falls under the broader structured credit universe (closer to the esotic side). At the end of the day, structured credit revolves around collateral (eg receivables and etc). Private credit is less collateral focused and lean more towards CF generation of the underlying business
what are some examples of receivables?
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