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Credit Enhancement
 
 
 

THE PROCESS OF REDUCING CREDIT RISK BY REQUIRING COLLATERAL, INSURANCE, OR OTHER AGREEMENTS TO PROVIDE THE LENDER WITH REASSURANCE THAT IT WILL BE COMPENSATED IF THE BORROWER DEFAULTED.

Techniques used to improve the credit rating of an asset-backed security or a bond, generally to get an investment grade rating from a bond rating agency and to improve the marketability of the securities to investors.

There are two general classifications of credit enhancements: third-party enhancement, in which a third party pledges its own creditworthiness and guarantees repayment in exchange for a fee; and self-enhancement, which is generally done by the issuer through Overcollateralization i.e., pledging loans with a book value greater than the face value of the bonds offered for sale.

Third party enhancements take the form of a Irrevocable loan Guarantee issued by a financial Institution, a surety bond from an insurance company, or a special reserve fund managed by a Financial Guarantee firm. The type of enhancement used and the amount of credit protection purchased varies according to the characteristics of the portfolio. Holders of the securities issued have recourse against the guarantor to the extent of the guarantee. Lines of credit are sometimes referred to as soft capital because they would not ordinarily be called upon.

Those clients who are capable of obtaining a Irrevocable loan Guarantee to provide Bonds issued by a A, AA or AAA rated carrier, Top 20 World Banks, or Top 20 World Bank - Bank Guarantee independently may qualify your project for the Corporate Funding Track.

A limited number of Credit Enhancements may be provided by an Investor on behalf of the client/borrower. Final determination is at the Investor's discretion, and is based upon both client and project credit worthiness. Therefore, only the most qualified applicants will be considered for Investor Sponsored Enhancement Placement.


EXAMPLES OF CREDIT ENHANCEMENTS INCLUDE: 

    • Collateralization: One or more parties may agree to post collateral. Collateral levels may be fixed or vary over time, depending on the market value of the deal.
    • Credit downgrade triggers: In the event that one of the party’s credit rating is downgraded below a certain level by a specified credit rating service, the deal is restructured or terminated. Such restructuring or termination may be automatic or at the option of the other parties to the deal. Other events, such a merger or acquisition, can also serve as triggers.
    • Third party guarantees: A third party may guarantee the performance of one or more parties to the deal. Alternatively, a letter of credit may be obtained from a bank.
    • Netting agreements: The deal may be executed under a master agreement which provides that obligations under the deal may be netted against offsetting obligations from other deals which are executed by the same parties and fall under the same master agreement.

     

 
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