Strip financing is the repackaging of different types of obligations—debt, preferred stock, common stock etc.—into one security. The idea is to ease conflicts of interest and agency costs between the holders of the initial components, bond and stockholders. Strip financing is the process of dividing a financial security, such as a bond or loan, into multiple components, each representing different cash flow streams. The separated components are then sold individually to investors who seek specific investment profiles.^[1]

In deals that are strip financed, returns to investors are generally derived from their equity positions (seen through how investors from time to time take losses on the debt components of the strip). Therefore, in a situation where a company is acquired through a strip-financed deal, and that company begins to default on loans, investors are more willing to renegotiate lending terms, thus avoiding the hold-up problem often seen in prior to and during bankruptcy. Also, repackaging can raise a securities' liquidity. One popular form developed in Canada was the Income Trust, which combined income from a high yield bond with a stock dividend. Beginning in 2003 this concept was expanded to the U.S. when "Income Deposit Securities" (also known as Enhanced Income Securities) were first offered on the American Stock Exchange (AMEX). These consist of a high yield bond and a class of common stock committed to pay a high dividend from free cash flows combined as a single unit.

Strip financing follows a systematic approach that enhances liquidity and flexibility in the financial markets. Below is a step-by-step breakdown:

1. Segmentation of Cash Flows: A security, such as a government bond, is divided into its interest (coupon) and principal components.
2. Repackaging: These segmented components are structured as separate tradable securities.
3. Sale to Investors: Investors can purchase either interest-only (IO) strips or principal-only (PO) strips based on their financial objectives.
4. Market Trading: The newly created securities are traded independently in financial markets, providing more investment opportunities.
5. Maturity and Payout: Investors receive payments based on the type of strip they hold—interest-only or principal-only.^[1]

• Securitization
• Contingent value rights
• Earnout