Structured as a security with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors.
The purpose of the arrangement is to pass the risk of specific default onto investors willing to bear that risk in return for the higher yield it makes available.
Created through a Special Purpose Company (SPC), or trust, which is collateralized with AAA-rated securities.
Investors buy securities from a SPC or trust that pays a fixed or floating coupon during the life of the note. At maturity, the investors receive par unless the referenced credit defaults or declares bankruptcy, in which case they receive an amount equal to the recovery rate. The trust enters into a default swap with a deal arranger. In case of default, the trust pays the dealer par minus the recovery rate in exchange for an annual fee which is passed on to the investors in the form of a higher yield on the notes.