Financial Engineering
When designing a bridge, the civil engineer works within physical and budgetary constraints: Will the bridge support 50 trucks at once? Will it withstand extreme winds? Will it survive an earthquake? How much will it cost? In designing a security or risk-management strategy, the financial engineer also works within physical and budgetary constraints: Will this project deliver the desired result even if the market moves suddenly or severely? How will it withstand a financial earthquake, such as payment defaults? How will it perform under current and future tax and accounting rules?
Financial Engineering by Seeds utilizes doctorate-level financial theory, mathematics, statistics, economic analysis and innovative financial instruments to design solutions for complex financial problems, managing risk, optimizing capital structure and ultimately, maximizing investment value.
Financial Engineering vs. Financial Restructuring
It is important to note that these concepts are related but not identical.
Financial Restructuring is concerned with improving the company's existing financial position, especially its debt, liquidity, and solvency.
Financial Engineering is a broader concept which includes creating new financing instruments, investment structures, risk-transfer mechanisms, and capital solutions.
Therefore, financial restructuring is said to be one very important application of financial engineering.
Where can Financial Engineering be used to help your company?
There are many areas in which Financial Engineering can be applied, the following are the most prominent ones:
Capital Structure
Optimize debt and equity to reduce the weighted average cost of capital (WACC)
Risk Management
Advise on the development of hedging strategies using derivatives, swaps and options
Investment Engineering
Structure investment funds, securitization, and risk-adjusted portfolios
Project Finance
Design financing structures for all types of corporations
Financial Derivatives
Advise on the need for development of futures, options, swaps, and structured products
Asset Securitization
Advise if there is a need to convert future cashflows into tradeable financial securities
Islamic Financial Engineering
Structure sukuk, ijara, murabaha, and other shariah-compliant instruments
How does Financial Engineering add value?
In the engineering process, the main goal is not simply to get more financing. Rather, it is to improve the financial economics of the company.
The main values added are:
■ Minimizing financing costs
■ Maximizing enterprise value
■ Boosting liquidity and cash flow
■ Allocating financial risks efficiently
■ Enhancing financial sustainability
■ Increasing risk-adjusted investment returns
■ Optimizing portfolios, where traders can healthily balance risks and returns
Additionally: Other Items to Consider for Optimal Financial Engineering
It is worthwhile to note that Financial Engineering does not directly create economic value on its own. Even if, on paper, the company has a low WACC or high equity IRR, we must evaluate leverage, default risk, transaction costs and the actual cashflows generated by the underlying business. Then, we can apply financial engineering to enhance performance and add value with time.
When used correctly, financial engineering can be a tremendous, high-value tool that combines financial restructuring, structured finance, project finance, risk management and capital optimization to create a sophisticated financial roadmap for your esteemed company.
Country Trends:
Financial Engineering in Saudi Arabia
Financial Engineering has a significant potential, especially considering Vision 2030 and the transformative plans the Kingdom has for the future. Here are just a few of the sectors that could benefit from it in the coming years:
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Real Estate
Developing recently surging REITS, securitization, and structured development finance
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Renewable Energy
Combining project debt, green sukuk, and equity investments
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Infrastructure and PPP Projects
Structuring long-term financing with government collaboration and private capital
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Investment Funds
Designing private equity, private credit, and infrastructure funds