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
Define the meaning of objective - financial management The term objectives offers a normative framework. That is the focus in financial literature is on what a firm must try to

Q. Show Function of the Financial decision? Financial decision: the second major decision is involved in financial management is the financial decision the investment decision

Q. What is ABC Analysis? ABC Analysis: - ABC Analysis is a method of controlling different items of inventory. Generally a firm has to maintain several different items as inven

Average of Relatives Method We have seen the construction of an index number using the aggregates method. In this section, we shall see the construction of an index using the

Illustration  Let us assume that Vishal Mehta & Co., (from Illustration 1) is using the following discounting rates in place of one rate:

how would you judge the potential profit of bajaj electronics on the first year of sales to booth plastics and give your suggestion regarding credit limit.Should it be approved or

Explain Gresham’s Law. Answer:  Gresham’s law considers to the phenomenon that bad (abundant) money drives good (scarce) money out of circulation. This type of phenomenon was fre

Foreign Exchange Rates The proportional value of one currency to other, used to exchange currency from one denomination to another.  For example, one British pound is wort

What is the advantages of IFRS 8 Advantages Allows users to view internal management's approach and highlights what's important from management's point of view.

Normally, floater coupon rate moves in the same direction as the reference rate. That is, with an increase in the reference rate, the floater coupon rate also increases