Structured Finance 101: What It Is and How You Break In

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Structured Finance JobsI’ve gotten requests to cover dozens of different topics – some of which are easy to find information on, and others that require Jack Bauer-style interrogation techniques to find clues.

In the latter category is Structured Finance – look around online and you’ll find dozens of different definitions and contradictory descriptions of what it is and what you do there.

The same thing happened when I started poking around online as well, so I decided the next best alternative would be finding a willing interviewee who works in the field – and that’s why you’re reading this right now.

Here’s what you’ll learn in Part 1 of this crash-course on Structured Finance:

  • How our interviewee moved from a liberal arts background with no finance experience to a bulge bracket bank.
  • What you do in Structured Finance.
  • How it’s different from investment banking, ECM, DCM, LevFin, and sales & trading.
  • How you break in and what to expect in interviews.

Let’s go:

Background and Definitions

Q: Let’s start with your background. What’s your story, and how did you break into finance?

A: I went to a top 20 undergrad university, and was originally a pre-law major – but then I took a class on economic forecasting, got started building models, and became much more interested in finance since it was more exciting and in-tune with my personality.

I graduated into a recession where jobs were almost non-existent, so I had to cast a wide net to find my first full-time job. I started out at an investment consulting firm, where I mainly conducted due diligence on private equity firms and hedge funds. As a result of this experience, I became very interested in the buy-side.

However, I knew I would need a different skill set in order to break in. After some research I decided that a job in banking would give me the broadest and most applicable experience.

The only problem: I had a liberal arts background and little finance experience on my resume. So I decided to fix those problems by going through 2 levels of the CFA and then refining my financial modeling skills.

Q: Now I’m going to stop the interview and end this discussion because you just mentioned “CFA.”

Just kidding, since it was actually useful in your case.

A: I knew you were going to have that reaction! While it was essential for me to learn about finance and demonstrate that I was both serious and capable, now that I’m working at a bulge bracket bank I can attest to the fact that the CFA is (1) Not helpful for advancement, (2) Not valued by your bosses, and (3) Not possible to pass with the hours you’ll be working.

Q: And then? This story doesn’t end with the exam magically getting you in, right?

A: Nope. I went through tons of cold calls, resume submissions, and the usual networking tactics you’ve recommended before, and finally landed an opportunity at a regional boutique bank that focused on technology M&A.

We worked mostly with $10 – $100 million revenue companies, and I liked it quite a bit at first since it was small and since I worked directly with the Partners. I spoke with CEOs and CFOs and learned all about banking there.

But I missed being involved with the markets, which are not really part of the equation for small, privately-owned companies, so I jumped at the opportunity to work in the Structured Finance group of a bulge bracket bank once I had been at the boutique for a while.

By then, the markets and hiring situation had improved quite a bit – and I wanted to work with bigger companies and on bigger deals.

I hesitated only because I didn’t know exactly what Structured Finance was at the time.

Q: On that note, what exactly is Structured Finance? And how is it different from investment banking and sales & trading?

A: It’s harder to define because SF groups differ depending on the bank, and so you can’t apply a cookie-cutter definition as you could to, say, industry vs. product groups.

Basically, “Structured Finance” refers to Fixed Income products and mostly mortgage-backed securities (MBS) and asset-backed securities (ABS).

An asset-backed security is just a security whose value and payments are derived from and backed by a pool of underlying assets – auto loans, home equity loans, student loans, and credit card receivables, for example.

A mortgage-backed security is a subset of ABS where the security represents a claim on the cash flows from underlying mortgage loans.

“Structured” means that these securities are secured – backed by collateral – and so they’re different from unsecured bonds (i.e. high-yield debt).

In Structured Finance, we help companies raise capital by creating (“structuring”) these types of securities and then selling them to investors.

Q: OK, so it sounds like a Capital Markets group but it’s different from ECM since you’re not dealing with equity at all.

But how is it different from DCM? Aren’t you also working with secured debt there?

A: The difference is that DCM deals with “plain vanilla” debt – standard loans that companies issue and which are based on those companies’ financial profiles and credit ratings.

In Structured Finance, we can use tools like “credit enhancement” and “bankruptcy remoteness” in order to bridge the gap between a company’s corporate rating and an A and sometimes even an AAA rating.

Since the note has these buffers, investors are more comfortable buying the paper and therefore require a lower interest rate – which reduces the issuer’s cost of debt.

Q: So you’re making securities from risky companies look less risky by packaging them together in fancy ways.

What exactly are “credit enhancements?” What about a “bankruptcy remoteness?”

A: Well, they look less risky because they are less risky. There are a few types of credit enhancement (stay with me – we’re about to get technical):

(1) Overcollateralization – This is when the value of the collateral pledged is higher than the contemplated size of the bond. If you have a pool of auto loans worth $100 and you are asking investors for a $90 bond, this is an example of overcollateralization. The benefit is the extra collateral available.

(2) Subordination – Structured Notes typically have multiple classes of bonds. Let’s say we have a bond with three classes (A, B, and C) and that the bond pays sequentially and is secured by equipment loans (think tractors and bull dozers).

Bond A will pay down, while Classes B and C will earn interest. Once Class A is paid down completely, B will start, then C. If any losses occur they will be absorbed by Class C, then B. A enjoys credit enhancement through subordination of Classes B and C.

These are 2 examples of “credit enhancements” – making a security less risky by adding in special terms and pledges.

“Bankruptcy remoteness” means that if the issuing company ever goes bankrupt, the bankruptcy court cannot touch the collateral that secures the structured notes and cannot use them to pay off another party.

So it’s sort of like a get-out-of-jail-free card – even if the worst happens and the company collapses, investors still have protection.

And it’s a win for the company as well, because the security gets a higher rating and the overall cost of borrowing goes down.

Q: So it sounds like you’re mostly working with lower-credit-rating companies and businesses that are on the brink of bankruptcy?

A: We work with companies across the credit spectrum, but not usually with those on the brink of bankruptcy.

We generally work with auto loan, credit card, and student loan companies – secured loans are well-aligned with their business models since they have stable cash flows.

Those are 3 of the most common types of companies we work with, but you can securitize cash flows for almost anything with a fixed cash stream – things like alarm systems, or even movie studios’ film franchise revenues (Miramax just priced a deal recently).

It all comes down to the stability of the cash flows and how appealing we can make it look by packaging the securities differently.

Q: I see – we’ll get into the technical details of your work later, but thanks for pointing that out.

I understand how it’s different from DCM and ECM, but what about something like Leveraged Finance? Do you see overlap with sales & trading or even with DCM, even though it’s technically different?

A: Sometimes we’re literally in competition with the DCM group – especially when the markets are poor and everyone’s fighting for the same funding. Both of us may go in and pitch the same companies on why they should pursue a certain financing strategy, so it can make for an awkward relationship.

There isn’t as much competition with Leveraged Finance since we often work with the LevFin team – companies sometimes have multi-step financing strategies and use both structured notes and high-yield debt to achieve their goals.

They might, for example, use structured notes to refinance high-yield debt or to pay it off when it reaches maturity.

At my bank, there are traders, bankers and salespeople that all fall into the SF group. The process starts with the bankers (my group) who “originate” business by pitching clients to issue MBS and ABS notes.

Once we win a mandate, we work with the rating agencies and lawyers to structure the deal. We get input from the sales force about investor demand for certain types of ABS throughout the process.

We talk to the traders as well to see where an issuer’s outstanding ABS notes might be trading to get additional color on any new issue pricing – and that’s how the bankers interact with the sales force and with traders.

Structured Recruiting?

Q: Thanks for that detailed overview of Structured Finance – it makes a lot more sense now.

What about the recruiting process? What should you expect in interviews?

A: Generally you get the same types of questions that you would get in any banking interview – accounting, valuation, and financial modeling, with the standard “fit” questions.

Most importantly, you need to understand what Structured Finance IS and know key buzzwords like “securitization” (the process of turning pools of loans into securities).

So do your homework on Structured Finance (everything above is a good start) and understand the types of assets that get securitized, the difference between an amortizing loan and a non-amortizing loan, and what makes an asset attractive or not attractive for securitization (hint: stable and predictable cash flows).

Your “story” is always important, and you need a solid reason for stating that you want to do Structured Finance – I can’t answer that one for you, but once you read part 2 of this interview you’ll get some more ideas.

One final point: recruiting, at least at my bank, is very heavily focused on only a few schools – our intern pool came from only 4 schools, so it’s even more limited than the usual “target school” selection.

That’s not to say you would be disqualified if you’re not coming from one of those schools (my alma mater isn’t on that list), but it certainly helps.

Q: It sounds very selective / random if they focus on only 4 schools.

What kinds of candidates are you looking for? Can undergraduates break in, or do you need more experience?

A: Most hires are straight out of undergraduate, but it’s such a niche area that there’s a premium for people who have experience.

There are only 10 or so banks with a strong presence in Structured Finance (you need a strong balance sheet, so pure-play investment banks aren’t market leaders), and generally the top 5 banks there look to hire undergrads and groom them to become future leaders, promoting them up the chain. They rarely make senior hires.

The bottom 5 banks in that group (anything smaller and more regional, and also a few European / Canadian / Other Foreign banks), by contrast, are constantly trying to poach talent from the top 5 banks and attempt to lure away senior bankers with more enticing pay packages.

You don’t need an MSF, MBA, or CFA to break in or to get promoted – few bankers here even have graduate degrees. They care 100x more about your practical experience and how well you understand Structured Finance than they do about your certifications.

We’re very focused on the “fit” of candidates, their relative intelligence, interest, and enthusiasm; just like in traditional investment banking, we spend countless hours with our colleagues… and we want to know that they’ll mesh with our group’s culture.

Q: So far it sounds much closer to a DCM or LevFin group in banking than a trading desk – what about an average day in your life, though?

Are you working market hours or banker hours?

A: Good question – that will have to wait until part 2 of this interview, where I tell you all about an average day in my life, the pay, my co-workers, exit opportunities and more!

About the Author

is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys learning obscure Excel functions, editing resumes, obsessing over TV shows, and traveling so much that he's forced to add additional pages to his passport on a regular basis.

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54 Comments to “Structured Finance 101: What It Is and How You Break In”

Comments

    • says

      It’s tougher from that background because there is not as much overlap with the law. You would probably have to work in a related group like Securities or Corporate at a well-known firm, work on structured financing-related deals, and then use that experience to move over. May be easier just to go to a group that has more overlap with the legal framework, like Restructuring.

    • Forgetful was Uh... says

      You can defend these groups in lawsuits where they get sued for selling toxic assets? Not a joke. I really see an opportunity there. Plus banks misinforming buyers ? selling toxic assets ? getting sued seems pretty cyclical. :D

  1. KM says

    Excellent article! I was looking forward for an SF related article for some time.

    @Adam T. not sure, but from the few entry level job offerings I’ve seen, they demand finance, accounting and law skills/knowledge.

  2. says

    Does Structured Finance Jobs even exist in the given market situation? I mean, its bad that people blame the SF for what happened in 2008 than blaming the actual cause. But the fact is that how the market is for this business now and are there any chances that this could be revived soon.

    • says

      They do still exist… this was a recent interview in fact. In Part 2, we’ll go through specific numbers and how there’s still plenty of activity even if it’s way down from pre-crisis levels. And the financial crisis and SF’s role in it will be addressed.

  3. Chris L. says

    Interesting read–definitely agree with most of the interview.

    I have a couple tips for people that want to break in:

    At most banks, when applying through campus recruiting, you should be applying to the Sales & Trading program, NOT the investment banking one. That is because ABS/MBS banking generally sits in the Securitized Products Group/Structured Finance Group (alongside sales people and traders), which is housed under Fixed Income Sales & Trading. I can’t think of any banks where securitization banking is in IBD proper, but I could be wrong. Obviously something to check if you’re interested in applying.

    I disagree with the idea that recruiting is more focused than in the general banking population (although this could be unique to my bank, one of the aforementioned ‘top 5′). Because of the way new S&T analysts are assigned to desks, you often see situations where people that thought they were signing up to trade stocks (or whatever it is they do on that floor) get put in what is basically an investment banking group. Which results in people transferring after a year or two, not something senior bankers really like (as the interviewee said, MBAs are completely unnecessary for associates in these groups and analysts usually move up).

    So if you can demonstrate an interest in structured finance and manage to network your way into applying to that group directly, you can break in from some schools way outside the typical banking targets. Many people in my group went to large state schools which never (ever) see recruiters for other front-office banking/trading positions. Since the skill-set is so peculiar to securitization groups (completely different kind of modeling work, as I’m sure the next interview will show) prior banking experience isn’t terribly sought-after and I highly doubt there are any modeling courses/academic classes that recruiters are looking for.

    That said, the market for structured products (*cough* toxic assets *cough*) has pretty much evaporated since ’07, and the level of regulatory scrutiny and turbulence in these markets has resulted in a massive downsizing of securitization banking groups everywhere.

    • KM says

      Interesting! I believe this segment was/is highly criticised after 2007/8 because of the toxic assets you mentioned, but these are/were a fraction of the whole structured products arena.. Besides all these financing techniques I believe qualify as financial innovation and can be highly useful for specific situations. But just like in many new products etc, many people have no idea how they work..

      And lastly, there is/were no such thing as toxic assets, only toxic prices ;)

    • Ronald says

      So Structured Finance is a dying industry which those who want to become millionaires by 30 and retire before 40 should never consider any more?

  4. SJV says

    Love it!! I too have been waiting for an SF article like this one.

    I’ll just add the following for those interested:

    -credit enhancement: look up excess spread as well (known as soft credit enhancement)

    -Individual loans being securitized can be very risky. For example, subprime auto loans make a Ford ABS subprime deal more risky and therefore the credit enhancement requirement is higher given the higher probability of obligor default, which translates into potential losses for the investor.

      • Chris L. says

        There are a few other credit enhancement types. “Excess spread” is used when creating MBS/ABS backed by loans, and is the difference between the (higher) rate charged to the borrower (“obligor”) and the rate paid by the lender (client of the bank) to holders of the security. So if loans start defaulting and collections fall short the client (lender) takes a hit before investors.

        A lot of deals also specify a “cash reserve” of a few hundred bps to further protect investors. This is exactly what it sounds like.

        These (along with overcollateralization and subordination) are the main quantifiable types of credit enhancement. Banks also sometimes provide (for a fee) letters of credit, basically a promise to make up any shortfall in payments to investors. On a related note, there used to be monoline insurers (MBIA and Ambac being the main ones) which ‘wrapped’ (insured) the securities and offered investors the financial security of their AAA ratings. Heavy losses in the credit crisis and subsequent downgrades have effectively put them out of business.

        The main point of credit enhancement is to ensure that an ABS will have a high rating and thus lower interest rate–more often than not, they are issued by below-investment-grade companies that would otherwise not have access to cheap capital. But ultimately, as the interview notes, ABS pricing (and also to an extent, subordination structure) is based on ‘whispers’ from investors to the group’s syndicate/trading desks.

        Another interesting thing to note is that you can securitize literally any future income stream–the range is shocking. Some of the more esoteric asset classes include aircraft fleet leases, alarm contracts, PE/VC/HF capital commitments, franchise fees (with the lien being on the intellectual property–the brand itself) and, I kid you not, future rock n’ roll album sales–google “Bowie Bonds.”

  5. Arman says

    High school kid here, I was wondering how important your undergrad school “name” really is. I notice people always seem to conclude Ivy-or-bust is the only way to get to a decent firm with the i-banking salary. Then, I see kids from the Virginias, UCs, etc. landing positions at really good firms. Is there any affect to say, your school’s prestige makes-or-breaks your chances?

    • John says

      This question seems to be little obvious. Undergrad school title is like having a brand name on your clothes. Doesn’t always mean you will get the highest quality product from that brand but yet you have a higher chance because of the reputation. Also being in those schools, you get better networking and so on.

    • M&I - Nicole says

      Your school’s prestige helps, especially if your school is a target, meaning banks recruit there. However, you can still get into great firms w/o an Ivy degree; it depends on your experience, skills, network, etc

    • Nate says

      I come from a no name school over 1000 miles from the nearest financial center. Even several people from my school are able to break into banking each year. However, if you do not want to spend all your time scratching and clawing your way in, your best bet is to go to an ivy league school or somewhere close to NYC/LA/Boston/Chicago

  6. KJ says

    I have a question regarding background check. I’m a bit ambiguous about something – not lying though. But when it comes to background check, do i just need to fill out the background check form truthfully and I’ll be fine?

  7. KJ says

    I met this MD guy in September on an info session. We hit it off well and he asked me to just send him my resume. I did and he never got back to me. So i didn’t follow up, but instead was just hanging out with the VP and associates. Now is it awkward to call the MD or send him an email?

  8. Son says

    “So you’re making securities from risky companies look less risky by packaging them together in fancy ways.”

    LOL. I love the way you sum up things.

    • M&I - Nicole says

      You need to fill that form in so the company your firm outsourced to can perform a background check on you

  9. AJ says

    Hi Brian,

    Great article; very informative, as usual.

    I’m currently a college senior and I had interned in Structured Finance Advisory this past summer, working with ABS & MBS. I found SF to be very interesting, and I hope to work with structured products in the future.

    Would it be possible to be put in contact with the interviewee? I am very interested in learning more about SF.

    Thanks.

    • M&I - Nicole says

      Probably not as the interviewee prefers to remain anonymous. Let us know if you have any particular questions and we can direct them to him

    • says

      I will actually ask the interviewee but he’s super-busy (took weeks to even finish this interview due to his work schedule) – will let you know when he has a chance, though.

    • INT says

      Hi AJ,

      Glad you’re into SF. I encourage you to wait around for Part 2 of the interview. If at that point you still have questions, you can post a comment. I’ll be happy to answer it when I have a free minute… typically when I’m standing on line at Starbucks ;)

  10. Dre60 says

    “The process starts with the bankers (my group) who “originate” business by pitching
    (clients = GSEs?) to issue MBS and ABS notes.”
    Who are these clients? Are they GSEs?

    “we work with the rating agencies and lawyers to structure the deal.”
    What legal terminology/documents should you know in Structure Finance? Pooling & Servicing Agreements, Service Level Agreements, Cure rights, Consent rights, Enforcement rights, Servicing rights, Purchase options, B-notes, Inter credit agreements, etc.? Or should lawyers should only know these?

    • says

      The clients are companies that need to raise funds. So no, not all GSEs… maybe some, but mostly normal companies that simply need funds to expand, hire more people, acquire, etc. More on this in part 2.

      You don’t do much on the legal side for SF as lawyers handle most of that. Bankers are more concerned with doing some basic modeling work, pitching deals, and coming up with the best terms. There may be some overlap but overall I don’t think you need to know all that lingo.

      • Dre60 says

        “The process starts with the bankers (my group) who “originate” business by pitching clients to issue MBS and ABS notes.” Do put together Marketing Pitch books?

        “they price and package complex financial products in Excel and then sell them to investors.”

        “We talk to the traders as well to see where an issuer’s outstanding ABS notes might be trading to get additional color on any new issue pricing”
        Are these Credit derivative traders?

    • Dude says

      For traditional ABS, typical examples of clients are auto and credit card companies. If you want to know which auto/card companies I mean specifically, just open your wallet or look around while driving. Those companies.

      Re: Legal jargon… as an analyst/associate you need to be able to read through OMs in order to understand the structures and how deals work (usuallyl so you can put together case studies or comp slides) – but a JD is not necessary. For non-traditional deals, senior bankers can get heavily involved in the structuring lanugage. They typically come up with the ideas for the structure and the lawyers reword it into legalese.

  11. TP says

    How is it possible that you keep emailing a person and he just never get back to you? Considering you guys actually get along… People were saying it might be he’s busy and emails sank to the bottom. But seriously, 4 emails and he never saw any one of them? How’s that even logical???

    • says

      In that case it’s better just to call… email gets ignored especially when it’s not from a client. I get hundreds of emails a day and it’s the worst possible way to reach many people. Phone calls are a less crowded channel, meeting in-person is even better.

      • TP says

        I tried calling as well – but couldn’t get past the assistant. The guy is normally pretty good at getting back to people. We traded a bunch of emails before early this semester. How do you explain that?

        • M&I - Nicole says

          Sometimes they are just busy, sometimes they lost interest. It has happened to all of us. Don’t worry about it. Perhaps you should give him another call

          • Michele says

            I’m actually in a similar situation: a BB guy was very warmhearted at the beginning but now he just ignores my emails.. I guess it happens to all of us. But if it’s because he lost interest, what if this guy is in charge of recruiting, does it hurt my chance of getting in? Thanks.

          • M&I - Nicole says

            If he is the MD of the team who is in charge of the team’s business yes, I think you should look elsewhere. However, if he is in HR, not a key member of the team, I don’t think it would be a big problem

  12. PIGS says

    Hi M&I,

    I cold emailed a partner (an alumni) from a botique/sector focused consulting firm and was ignored.

    3 months later, frustrated, I did an online application via the firm’s website, did the online tests and now I have an interview with the aforementioned partner and a senior engagement manager.

    How do I conduct myself in this situation? Basically this botique firm was a backup of mine if I failed to get into MBB (which I did).

    Cheers
    PIGS

    • M&I - Nicole says

      I presume the partner might have just been busy and forgot to respond, didn’t want to respond cause he/she didn’t know you, or he/she might not have even remembered your email. I wouldn’t worry too much about it. Just attend the interview and act yourself.

  13. Glyndav says

    Hierarchy question: would it be appropriate to ask for an informational interview from the global head of securitization at a bank? I mean, would this be futile like asking a Jamie Dimon style character to share his career path etc (for example, his bio is already out in the public domain). Am I better off asking to speak to his research or structuring people?

    Here’s what I’ve done so far: I emailed to ask for advice and his views on the field, whether it is a good area to look into at the moment, and whether there are structurers/researchers he would recommend I talk to. He seemed really nice in person but before making the ask for an informational interview I wanted to gauge his overall receptiveness.

    In general, how does one network with very senior people?

    • M&I - Nicole says

      In your case, I’d politely ask for an informational meeting with him then. I believe I’ve responded to your similar question on another post so you can incorporate that answer with this one.

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