Credit enhancement mechanisms, Financial Management

Credit enhancement is a key part of the securitization transaction in structured finance, and is important for credit rating agencies. Credit enhancement is of two types - External credit enhancements, and Internal credit enhancement.

  • External Credit Enhancement: It comes in the form of third-party guarantees like corporate guarantee, letter of credit, and bond insurance. The disadvantage of this mechanism is that it is based on the credit risk of the third party guarantor. If the third party guarantor feels downgraded then the issue would also be subjected to downgrade, even if the structure is giving expected performance. In other words, this mechanism places the investor to event risk because the downgrading of the third party guarantor may result in downgrading of the asset-backed securities.

  •  Internal Credit Enhancement: It comes in the form of reserve funds, over collateralization, and senior/subordinate structures. This is a more complex form of mechanism when compared to that of external credit enhancement mechanism.

Posted Date: 9/8/2012 7:11:44 AM | Location : United States







Related Discussions:- Credit enhancement mechanisms, Assignment Help, Ask Question on Credit enhancement mechanisms, Get Answer, Expert's Help, Credit enhancement mechanisms Discussions

Write discussion on Credit enhancement mechanisms
Your posts are moderated
Related Questions
Directors and managers While directors and managers are in concentrate attempting to promote and balance the interests of shareholders and other stakeholders it has been argued

Describe the general pattern of cash flows from a bond with a positive coupon rate. Cash flows as of a bond with a positive coupon rate consist of periodic interest payments an

discuss the applicability of operating cycle in poultry (consider broilers)

ON THE BASIS OF FLEXIBILITY • Fixed budget: this is designed to stay unchanged irrespective of the volume of output or turnover attained.  The budget remains unchanged over

Q. What is Cost Recovery Method? Cost Recovery Method - METHOD OF REVENUE RECOGNITION that identifies profits after costs are entirely recovered. Normally used only when the to

a) Ltd. stands for ‘private limited company', i.e. a business with limited liability with shares being issued only to friends and family with the approval of the board of directors

You work for a small, for-profit health system. Your system is interested in acquiring a Critical Access Hospital (CAH) at a price of $65,000,000. The purchase would be made from r

Q. Explain Discounting or Present Value Concept? Discounting or Present Value Concept: - According to this concept rupee one of today is more valuable than rupee one a year lat

Remaining differences with US GAAP IFRS 8 comprise intangible assets as part of the non-current assets. SFAS 131 only refers to tangible assets. IFRS 8 requires method

If the issuer company is taken over, then the bondholders are likely to suffer. It is due to lowering of the stock prices in the market as a post takeover effect.