External credit enhancement, Financial Management

It is in the form of third-party guarantees which protect against losses up to a particular fixed level. This is available in the form of a corporate guarantee, a letter of credit from a bank or a bond insurance. Though the third-party guarantee is referred to as "first loss protection", it is generally not used as a primary protection.

For example, if in a Rs.100 crore asset-backed securities deal, 10% is guaranteed, then for any losses that are in excess of 10%, the sponsor will not be liable. Thus, we see that an asset-backed security which has an external credit support is prone to credit risk of the third-party guarantor. If the third-party guarantor undergoes a downward change in credit rating, then the rating of the issue will also be lowered even if the performance of the entire structure is intact. This is because of the general practice the rating agencies follow by which the credit quality of the issue is assessed to be only as good as the lowest link in credit enhancement.

Posted Date: 9/8/2012 9:08:16 AM | Location : United States

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

Write discussion on External credit enhancement
Your posts are moderated
Related Questions
Explain the term- Authorised and Paid-up Share Capital Number of shares of stock provided for in Articles of Association of a company is the authorized share capital. This figu

Imagine you have been allocated $100,000 which is to be invested in 8 companies listed on the Australian Stock Exchange (ASX). You are required to have a balanced portfolio betwee

A Ltd sells goods at Rs.10.P.U. Its variable cost Rs.7.P.U and fixed cost amount to Rs.1,70,000 it finances all its assets by equity funds. It pays 40% tax on its income. Z Ltd is

State the Types of integration Types of integration Horizontal Target company has same operations, and is in the same industry

Briefly describe the major differences between a sole proprietorship and a corporation. Under which form would you choose for a business, and why? Describe the meaning of financi

DEFINITION OF FINANCIAL MANAGEMENT Financial Management is a stream concerned with the generation and allotment of scarce resources (generally funds) to the most proficient use

Discount Pricing The T-bills are issued at a discount to face value and hence have no coupon. Commission rates on round lots generally range from $12.50 to $25.00 per $1 mil

Explain the Strategic alliance Two  or  more  organisations  agree  to  work  and  collaborate  informally  together  however remaining  independent  from  one  another. Simila

FUNCTIONS / RESPONSIBILITIES / CHALLENGES FACING THE FINANCE MANAGER Today's finance manager is facing a lot of challenges, which are the direct result of the dynamic growth in