Structures
Repackaging structures
Repackaging structures
Many of the most attractive credit assets come in the wrong package. Private credit fund LP interests, CLO equity, unrated corporate loans, foreign currency bonds: they offer compelling risk-adjusted returns but fail regulatory tests that determine which investors can buy them. Repackaging solves this by wrapping difficult assets in structures that meet insurance company, pension fund, and regulated investor requirements.
The core mechanic is simple: an SPV acquires the problematic assets and issues notes with the characteristics investors need. A BBB rating. USD denomination. Fixed income classification. The underlying economics stay the same; only the wrapper changes.
Why repackaging exists
The regulatory mismatch problem
Insurance companies face punitive capital charges on unrated assets. A direct loan to a corporate borrower might require 4-6% risk-based capital if unrated, versus 0.4-1.3% if rated BBB. That capital charge difference makes the unrated loan economically unattractive even if the credit quality is identical.
Funds face different constraints: mandate restrictions on asset types, concentration limits, liquidity requirements. A high-yield fund can’t hold LP interests in a private credit fund. A fixed income portfolio can’t own CLO equity. A US-focused insurance account doesn’t want currency risk.
Assets commonly needing repackaging:
| Asset Type | Problem | Regulatory Impact |
|---|---|---|
| Private credit fund LP interests | Equity treatment | 30% RBC charge for insurers |
| Unrated corporate loans | No rating | NAIC-6, highest capital charge |
| CLO equity | Equity classification | Not eligible for many fixed income mandates |
| Foreign currency bonds | FX risk | Hedging complexity, basis risk |
| Real asset leases | May not qualify as fixed income | Ineligible for bond portfolios |
| Trade finance receivables | Short-dated, granular, unrated | Poor capital efficiency |
When repackaging makes sense
Repackaging costs money (structuring, legal, rating fees, ongoing administration). It only makes sense when the benefits outweigh these costs:
- Size threshold: $25M minimum, $50M+ preferred. Fixed costs of $300K-$800K need spread across sufficient notional.
- Clear regulatory benefit: The capital charge reduction or mandate compliance must be material. Going from 1% RBC to 0.5% might not justify the cost; going from 30% to 1.3% certainly does.
- Underlying credit quality supports the target structure: You can’t manufacture investment grade out of junk. The assets need to support whatever rating or structure you’re targeting.
- Investor demand exists: Repackaging into a form nobody wants is pointless. Start with the investor need and work backward.
Common repackaging structures
Currency repackaging
Problem: Investor wants USD exposure but the asset pays EUR, GBP, or JPY.
Solution: SPV buys the foreign currency asset, enters a cross-currency swap, and issues USD-denominated notes.
How it works:
- SPV acquires EUR-denominated corporate bond paying 4.5%
- SPV enters cross-currency swap: receives EUR fixed, pays USD fixed
- SPV issues USD notes to investor
- EUR bond coupons flow through swap, convert to USD coupon payments
- At maturity, EUR principal converts to USD principal via swap
Considerations:
- Swap counterparty credit risk matters. If the swap counterparty defaults during the life of the note, the investor is exposed to currency moves.
- Basis risk exists if swap and bond cash flows don’t align perfectly (payment dates, day count conventions).
- Hedging cost is embedded in the note spread, typically 10-25bps.
Credit repackaging
Problem: Asset is unrated; investor needs rated securities.
Solution: SPV acquires unrated assets, engages rating agency, issues rated notes.
Three approaches:
Single-asset repack: One underlying asset, rating based on credit analysis of that single obligor. Works when the obligor is large enough to support rating agency analysis but hasn’t obtained a public rating (common with private placements to insurance companies).
Portfolio repack: Multiple assets pooled together. Diversification supports rating. Similar to CLO methodology where correlation assumptions and subordination determine tranche ratings.
Credit-enhanced repack: Add subordination, guarantees, or letters of credit to boost rating above what the underlying assets would support alone.
Note: Single-asset repacks are simpler but more concentrated. Portfolio repacks offer diversification but require ongoing portfolio management. Choose based on asset availability and investor preference.
Maturity transformation
Problem: Asset tenor doesn’t match investor need (too long, too short, bullet vs. amortizing).
Solutions:
Shorten long assets: Issue notes with call/put features against long-dated underlying assets. Investor gets shorter exposure but bears call risk.
Extend short assets: Pool short-dated assets in a revolving structure that continuously reinvests maturities. Investor gets desired tenor but bears reinvestment risk.
Convert amortizing to bullet: Pool amortizing loans, use principal paydowns to pay note interest, issue bullet principal repayment at maturity. Works when prepayment modeling is reliable.
Structural transformation
Problem: Asset is equity-like but investor needs debt-like exposure.
This is the most complex and valuable form of repackaging. Private credit fund LP interests, CLO equity, real asset ownership all have equity characteristics (variable returns, no stated maturity, subordinate claims). Many investors can only buy debt.
Solution: SPV acquires equity-like assets, issues senior debt against them, residual equity absorbs volatility.
Example structure:
- SPV owns $100M of diversified CLO equity positions
- SPV issues $50M senior notes (50% LTV)
- $50M residual equity retained by sponsor or sold separately
- Senior notes may achieve investment grade rating due to subordination cushion
Considerations:
- Leverage amplifies both upside and downside
- NAV volatility affects subordination cushion continuously
- Similar to rated note feeders but applied to specific assets rather than an entire fund
Insurance wrapper repackaging
Problem: Asset doesn’t qualify for favorable NAIC or Solvency II treatment.
Solutions:
Funding agreement-backed notes (FABNs): Insurance company issues a funding agreement; SPV repackages into tradeable notes. The funding agreement itself gets favorable treatment as an insurance product.
Schedule D qualification structuring: Engineer the note terms to meet bond definition for statutory accounting. This may require specific coupon structures, maturity features, or issuer characteristics.
SVO filing optimization: Work with NAIC Securities Valuation Office on filing to achieve best possible designation.
Important: Insurance regulatory treatment varies by state and changes over time. Get current regulatory advice before assuming any structure qualifies for favorable treatment.
Use cases by asset type
Private credit / direct lending
Situation: Large insurance company wants direct lending exposure. Can’t invest in fund LP interests (30% RBC charge). Can’t make direct loans without building origination infrastructure.
Repackaging solution:
SPV co-invests alongside private credit fund in specific loans. SPV issues rated notes to insurance company. Insurance company gets Schedule D treatment at 1-2% RBC charge.
Worked example:
| Component | Economics |
|---|---|
| Underlying loan | L+500, 4-year, senior secured |
| Loan rating (if rated) | BB (estimated) |
| Repackaged note | L+425, 4-year |
| Note rating | BBB (achieved via credit analysis plus structuring) |
| Structuring cost embedded | 75bps |
| Insurance RBC charge | 1.3% (NAIC-2) vs. 30% for LP interest |
The insurance company gives up 75bps of spread but reduces capital charge from 30% to 1.3%. On a $50M investment, that’s $14.35M of freed capital.
CLO equity
Situation: CLO equity offers 12-18% expected returns but is equity for regulatory purposes. No insurance company can justify the capital charge.
Repackaging solution:
SPV acquires diversified portfolio of CLO equity positions. Issues senior notes at 50-60% LTV. Senior notes may achieve investment grade rating. Residual equity sold to hedge funds or retained.
Worked example:
| Component | Value | Return |
|---|---|---|
| CLO equity portfolio | $100M | 15% expected |
| Senior notes issued | $55M | 8.5% coupon |
| Subordination | 45% | - |
| Senior note rating | BBB | - |
| Residual equity value | $45M | 22% expected (levered) |
| Insurance investor RBC | 1.3% | - |
The senior note investor gets CLO equity exposure in a fixed income wrapper with 45% cushion before losses reach them. The equity holder gets levered returns.
Trade finance
Situation: Trade receivables yield 4-8% with very short duration (30-180 days) but are granular, unrated, and operationally complex for most investors.
Repackaging solution:
SPV acquires revolving portfolio of trade receivables. Issues rated notes with quarterly interest and bullet maturity. Continuous reinvestment maintains exposure.
Structure mechanics:
- Pool of 500+ receivables, average $100K each, average tenor 90 days
- Over-collateralization: 110% asset coverage
- Liquidity reserve: 3 months interest coverage
- AA rating achievable on senior notes
Economics:
| Component | Yield/Cost |
|---|---|
| Receivables portfolio yield | 6.5% |
| Senior notes (85% of structure) | 4.0% |
| Junior notes (5% of structure) | 7.5% |
| Equity (10% of structure) | 18%+ |
| Structuring/admin cost | 0.5% annually |
Illustrative pricing. See pricing disclaimer.
Infrastructure and real assets
Situation: Infrastructure asset generates stable, long-dated cash flows (contracted toll road, solar farm, etc.) but ownership is equity. Fixed income investors want exposure.
Repackaging solution:
SPV acquires infrastructure asset. Issues long-dated debt sized to debt service coverage ratios. Creates debt-like exposure to equity-like asset.
Worked example: Solar portfolio
| Component | Details |
|---|---|
| Asset | 100MW contracted solar portfolio |
| Asset value | $150M |
| Annual contracted revenue | $18M |
| Operating costs | $3M |
| Net cash flow | $15M |
| Debt issued | $100M, 15-year, 5.5% coupon |
| Debt service | $9.6M annually |
| DSCR | 1.56x |
| Rating | A- (based on contracted cash flows, coverage) |
| Equity return | 12%+ (on $50M residual) |
Mechanics and documentation
SPV structure
Every repackaging uses a special purpose vehicle. The SPV must be:
Bankruptcy remote: If the asset seller or sponsor fails, the SPV and its assets remain isolated. This requires:
- Limited purpose entity (only holds the specific assets and issues the specific notes)
- Independent directors (not controlled by potentially insolvent parties)
- Non-petition covenants (parties agree not to petition SPV into bankruptcy)
- Separateness provisions (SPV maintains its own books, accounts, doesn’t commingle)
Jurisdiction selection depends on investor base:
| Jurisdiction | Use Case |
|---|---|
| Delaware | US domestic, standard choice |
| Cayman Islands | Offshore flexibility, tax neutral |
| Ireland | European investors, EU passporting, treaty access |
| Luxembourg | European investors, alternative to Ireland |
| Jersey | UK-focused transactions |
Tax considerations:
- Pass-through treatment avoids entity-level tax (most common)
- Withholding tax on payments depends on jurisdiction, investor location, treaty access
- Structure early for tax efficiency; fixing later is expensive
Cash flow mechanics
Standard waterfall:
- Underlying asset cash flows → SPV
- SPV expenses (trustee, administrator, ongoing costs)
- Swap payments (if any hedging)
- Senior note interest
- Junior note interest (if any)
- Reserve account top-ups
- Equity distributions
Principal payments: Typically sequential (senior paid first) but can be pro-rata for simpler structures.
Hedging:
- Interest rate swaps convert fixed/floating mismatches
- Cross-currency swaps handle currency transformation
- Counterparty risk managed via collateral posting (CSA), rating triggers, replacement provisions
Reserve accounts:
- Interest reserve: 1-3 months coverage for timing mismatches
- Liquidity reserve: Short-term cash needs
- Loss reserve: Credit protection buffer
Key documentation
| Document | Purpose |
|---|---|
| Offering memorandum | Describes assets, risks, terms for investor due diligence |
| Indenture / note purchase agreement | Note terms, covenants, events of default |
| Asset purchase agreement | How assets transfer to SPV, representations, substitution mechanics |
| Servicing agreement | Who services underlying assets, reporting, successor provisions |
| Swap documentation (ISDA) | Hedge terms, collateral requirements, termination events |
Rating and regulatory considerations
Rating agency approach
Single-asset repackaging: Rating typically equals underlying asset credit quality. Currency or maturity transformation doesn’t affect credit if properly hedged. The rating reflects: obligor creditworthiness, structural features, counterparty risks.
Portfolio repackaging: Diversification benefit recognized. Methodology similar to CLO/CDO rating:
- Asset-by-asset credit analysis
- Correlation assumptions
- Default/recovery modeling
- Subordination calibration to target rating
What rating agencies focus on:
- Counterparty risk (swap provider, servicer failures)
- Legal structure (true sale, bankruptcy remoteness)
- Cash flow timing (liquidity to meet payments)
- Ongoing surveillance requirements
NAIC treatment (US insurance)
Schedule D qualification is the goal. Notes must meet statutory accounting bond definition:
- Unconditional promise to pay
- Fixed or determinable payments
- Fixed maturity
- No equity features
Designation process:
| Path | When It Applies |
|---|---|
| Filing exempt | Agency-rated notes, automatic designation |
| Filing required | Unrated or complex structures need SVO review |
| Designation range | NAIC 1-6 scale mapping to RBC charges |
NAIC designation to RBC charge:
| Designation | Equivalent Rating | RBC Factor |
|---|---|---|
| NAIC-1 | AAA to A- | 0.4% |
| NAIC-2 | BBB+ to BBB- | 1.3% |
| NAIC-3 | BB+ to BB- | 4.6% |
| NAIC-4 | B+ to B- | 10.0% |
| NAIC-5 | CCC+ to CCC- | 23.0% |
| NAIC-6 | Default/Unrated | 30.0% |
Important: The NAIC SVO has become more skeptical of complex repackagings. Structures that worked in 2020 may face more scrutiny today. Get SVO pre-filing feedback before committing to a structure.
Solvency II treatment (European insurance)
Spread risk charge depends on rating, duration, and asset type. Securitizations receive Type 1 or Type 2 treatment:
- Type 1 (lower charge): Senior, high-quality, meets STS criteria
- Type 2 (higher charge): Most repackagings fall here
STS qualification (Simple, Transparent, Standardized) provides capital benefit but most repackagings don’t qualify. Requirements are stringent around disclosure, structural features, and asset eligibility.
Economics and execution
Cost components
Initial costs:
| Component | Range |
|---|---|
| Structuring (arranger fee) | $150K - $400K |
| Legal documentation | $150K - $400K |
| Rating (initial) | $75K - $300K per tranche |
| SPV formation, accounts | $25K - $75K |
| Total initial | $400K - $1.2M |
Ongoing costs:
| Component | Annual Range |
|---|---|
| Administration, trustee | $25K - $75K |
| Rating surveillance | $25K - $75K per tranche |
| Accounting, audit | $20K - $50K |
| Legal (amendments, etc.) | $10K - $50K |
| Total annual | $80K - $250K |
All-in cost analysis:
On a $50M repackaging with $700K initial costs and $150K annual costs over 5 years:
- Initial cost amortized: 28bps annually
- Ongoing costs: 30bps annually
- Total embedded cost: ~58bps annually
This is why minimum size matters. The same structure on $100M costs only 29bps annually.
Value creation framework
For the asset seller/sponsor:
- Access broader investor base (insurance companies, regulated funds)
- Potentially better pricing than selling to unregulated buyers
- Option to retain residual economics (equity tranche)
For the investor:
- Access otherwise inaccessible assets
- Regulatory capital efficiency (the whole point)
- Risk transfer via subordination (in tranched structures)
Value leakage to watch:
- Arranger/structurer fees
- Bid/offer on underlying asset acquisition
- Ongoing administration drag
- Spread premium for complexity and illiquidity
Execution timeline
| Phase | Duration | Key Activities |
|---|---|---|
| Origination | 2-4 weeks | Identify assets, preliminary analysis, investor sounding |
| Structuring | 4-8 weeks | SPV formation, documentation drafting, rating engagement |
| Marketing | 2-4 weeks | Investor outreach, due diligence, pricing negotiation |
| Closing | 1-2 weeks | Final documentation, asset transfer, note issuance |
| Total | 9-18 weeks |
Bespoke single-investor deals can execute faster (6-10 weeks). Complex multi-tranche, multi-investor deals take longer.
Provider landscape
Investment banks: Full-service capabilities, rating agency relationships, distribution. Best for larger deals ($100M+) or novel structures. Goldman, Morgan Stanley, BofA, Citi all have structured credit desks.
Specialty arrangers: Focus on specific asset classes (trade finance, infrastructure, CLOs). Often better economics for $25-75M deals. More flexible on structure but less distribution capacity.
In-house capabilities: Large insurance companies and asset managers increasingly build internal repackaging teams. Apollo, Blackstone, Ares all do proprietary repackaging. Reduces arranger dependency and cost.
Cross-references
- Rated Note Feeders for fund-level repackaging structures
- Credit-Linked Notes / Synthetic Structures for synthetic repackaging approaches
- Insurance Capital for detailed NAIC and Solvency II treatment